Disclaimer- I know nothing about this at all so treat me accordingly

A family member has built a successful business over the last decade. Basically, it's online commerce that sells a certain consumer good made by a national brand as a house brand. The manufacturer handles all the shipping and he basically enters the orders from his website into the manufacturer website. There is some customer service involved but pretty brilliant and easy setup. (I don't want to specifically identify what it is because it would be pretty easy to identify) He is getting older and looking to retire in a couple years and sell the business. The exact valuation is unknown, but lets just generalize it at $2-3 million. My wife and I are teachers so we definitely don't have the cash to buy it in cash. Here are my questions-

1. What would it look like to see if he would owner finance? Is that a thing?
2. Are there business loans that would cover that and what does that process look like?
3. What questions should I be asking him if/when I approach him about this idea?

Pay him a percentage of net profit until a certain $ is reached.

Find out smallest monthly gross sales in last 24 months.
Minus your reasonable salary
Minus your operating expenses
=Net profit
-30% for taxes in an account until the bill comes
-10% for retained earnings in a different account


Don;t saddle yourself with a loan whose payments you may not be able to make at some point in the future. No one is obligated to buy your widget, so don't make yourself obligated to a payment if you don't make money one month

cadetjay02 said:

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Disclaimer- I know nothing about this at all so treat me accordingly

A family member has built a successful business over the last decade. Basically, it's online commerce that sells a certain consumer good made by a national brand as a house brand. The manufacturer handles all the shipping and he basically enters the orders from his website into the manufacturer website. There is some customer service involved but pretty brilliant and easy setup. (I don't want to specifically identify what it is because it would be pretty easy to identify) He is getting older and looking to retire in a couple years and sell the business. The exact valuation is unknown, but lets just generalize it at $2-3 million. My wife and I are teachers so we definitely don't have the cash to buy it in cash. Here are my questions-

1. What would it look like to see if he would owner finance? Is that a thing?
2. Are there business loans that would cover that and what does that process look like?
3. What questions should I be asking him if/when I approach him about this idea?

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Owner financing was pretty common when I was still in practice, particularly when relatives were involved. Spreads the sellers tax liability over several years and the interest rate on the note would exceed what they could get at the bank. Sellers will often want a large down payment; their fear is the new buyer letting the business go downhill and then having to take back the business after it is in decline.

I would want to see the customer list and the annual revenues for the prior 3 to 5 years to see if any of his customers have left, or if any of them are starting to do less and less business with him.

cadetjay02 said:

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1. What would it look like to see if he would owner finance? Is that a thing?
2. Are there business loans that would cover that and what does that process look like?
3. What questions should I be asking him if/when I approach him about this idea?

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Some feedback for you ...

1. Seller financing is always a viable option, but the biggest question is "why would a seller finance his own deal?" If he has a business that's valued in $2M-$3M range, chances are he has pretty clean financials ... and if he has clean financials that can support a price like that, then a buyer will likely be able to secure third-party debt to fund the transaction. Meaning he'll be able to walk away with all cash at closing, or close to it. As a general rule, if a seller is willing to finance a substantial amount of his sale price, there's most likely a problem with the business or the financials that make bank financing unattainable - or it's a much smaller deal where the amount of cash at closing on a cash deal vs. a seller financed deal is not materially different to begin with.

2. Yes. If the business has clean books that support the agreed-upon value, then there are business acquisition financing options available, most notably being SBA loans. SBA 7(a) financing is available up to $5M, and in some cases can go higher - so it works for the value range you're expecting here. You should expect to put down 10%-20% of the purchase price on these types of loans. However, there is a new SBA policy that offers buyers an avenue to acquire a business with $0 down - it's too cumbersome for an explanation here, but simply put it requires the seller to carry a small note which is then used as the buyer's equity injection. I'm happy to talk with you more about these options and refer you to a couple of great lenders if you'd like.

3. That's a tough one, and it really depends on your relationship with him. My advice would be to be blunt - would you consider giving us the opportunity to buy your business if we can put a deal together that makes sense for all of us? If he's open to it, the first thing you'll need to do is get a business market valuation done - don't rely on his estimate of value or what he thinks he wants. I could help you with that if needed. From there it's a matter of seeing what kind of financing you can get, and work from there to see what he's willing to accept.

Feel free to reach out if you have any other questions ...

Following up on what king said, yes you can "owner finance" the transaction. I agree it is best to try not to get burdened with a loan at the beginning as you don't know what the business will actually generate for you until you are in the driver's seat.

There are many creative ways to structure such a deal. Since it is a family member, you would likely have a good shot at getting something worked out that is agreeable to both parties. Let me know if you need any assistance.

Thank you for the response. My wife and I are going to talk this weekend and formulate our plan for gauging his interest. If that goes well, I'll reach out to you and see about the valuation and SBA info. I perused your website, are you in the Dallas office?

I'm in Dallas

Another option is to buy it and pay him for X months to maybe 3 years as a consultant. He facilitates the transition and gets some cash out of the deal and if he's owner financing he'll appreciate having a role in insuring you get off to a good start.

I agree with what was said above. That being said, it never hurts to throw it out there... there are a few folks on here who could help finance the deal themselves based on fundamentals. PM me if interested.

Would you consider a partner?

Make sure you don't "buy yourselves a job". Let's say it pockets $200k per year. You and wife could have worked jobs and made nearly that much money. And you don't have to fork over any cash.

What would it cost to build a company just like it, across the street? You may not want to start from scratch. But a competitor will. If it's that easy, expect competition.

Also, make sure it is a business you can be passionate about and have the skills to operate it and/or people on staff who have those skills. Running a business sounds simple to most people but I find the majority of people don't have what it takes. The biggest weaknesses, 1) making the hard decisions like firing an employee, 2) knowing when to take a big risk, 3) good negotiating skills, 4) complacency/failure to innovate and 5)managing the supply chain. I am sure others can add to this list.

Being a business owner can be great but it rarely a 40 hour a week job and the stress can be intense at times.

Kansas Kid said:

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Also, make sure it is a business you can be passionate about and have the skills to operate it and/or people on staff who have those skills. Running a business sounds simple to most people but I find the majority of people don't have what it takes. The biggest weaknesses, 1) making the hard decisions like firing an employee, 2) knowing when to take a big risk, 3) good negotiating skills, 4) complacency/failure to innovate and 5)managing the supply chain. I am sure others can add to this list.

Being a business owner can be great but it rarely a 40 hour a week job and the stress can be intense at times.

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Those are great points and I'd like to add to one or two of them, if I may. I was never a business owner, but I represented many and observed successful and non-successful characteristics.

#2 - knowing when to take a big risk. I've worked for two hyper-successful men and they both were unbelievably decisive. They could both make major decisions after just a few minutes of briefing. However, interestingly, they both shared a view on risk that was different than what most people and pundits believe. They understood their businesses well enough that what others saw as risky, they saw as sure things. In other words, they invariably made what they perceived as "low risk" decisions. They were most definitely not gamblers except when they knew for sure that the odds were stacked in their favor.

However, they were not paralyzed by analysis. They were very tolerant of mistakes of their own and of others, so long as those mistakes were not stupid (overlooking obvious flags) or repeated.

#3 - good negotiating skills. This does not necessarily mean "winning" every negotiation. Sometimes one can win the battle but lose the war. If you want a long-term relationship with the other side to a negotiation, it may be best to allow them to "win" something even if you have the negotiating power to take everything.

Fully agree with your comments.

Thank you all for the replies. I'm going to make the call this week and see what his interest is. Best case scenario is my wife and I will go meet with him over Thanksgiving and dive into the myriad of questions he and I will have.

Hopefully I'll post back here in a couple days with an update and and need more detailed information on what the financials I should be looking at. Also, bizbroker- I'm in Frisco so you'll probably be my first call should things progress.

It's not uncommon for a small private owned business to feel it's worth 8 to 10 times net profits. That is, they are making $200,000 net profit per year and think the business should sell fir $2MM. That's just too high unless sales and profit are steadily increasing or you have reason to believe they will. But with a steady net profit, most businesses (with few hard assets like I assume this is) are worth about 3 to 5 times annual net profit.

They typically don't consider the buyer's risk if things turn south after a few years. In such a case, you are lucky to get your initial investment back and make no profit for your 3-5 years work. But the buyer is looking at it as "Hey, I could just coast on autopilot for three years and make the same money AND still own 100% of my business at the ebd."

The reality is, they really need to be at the point they're ready to feel like they're "giving it away" to reach a fair agreement.

Perhaps reviewing these realities with your relative would be good to set proper expectations before you both start throwing around numbers that are way different and get resentful about it.

Good luck

I agree completely.

I also think it is funny that the OP alluded to a 2-3MM valuation in what sounds like a 1 man show (assuming here), and not many people questioned this. If I was to purchase this business at $2MM and I had to take on debt to purchase, I would want this business to return 400M to 500M annually. Otherwise, it is not worth the risk. This is especially true with the interest rates that are available today.

I was watching Buffet on YouTube and the question came from the audience about Buffet's recommendation on choice of business school. He basically said that nobody will teach you what you need to know, which was in his opinion the most important thing you need for investing: how to value a business.

as said above-don't buy a job. You are investing money, committing capital-you should get a return on that plus get paid for your work. That salary may be small initially as you grow, evolve the business.

Look closely at cash flow for last few years.

Are there any large clients who have personal relations with the seller who may depart when he does?

Do you want to own a business? It can be hard work and isn't for everyone.

You guys have done a good job in showing to the OP that a business may not necessarily be worth as much to him, as a buyer, than the Seller thinks it's worth.

But how does a buyer convince a Seller, especially a Seller that's not represented by a broker that's prepared them for the low value shock, to be willing to sell for a much smaller number than what's in the Seller's head?

Jabin said:

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You guys have done a good job in showing to the OP that a business may not necessarily be worth as much to him, as a buyer, than the Seller thinks it's worth.

But how does a buyer convince a Seller, especially a Seller that's not represented by a broker that's prepared them for the low value shock, to be willing to sell for a much smaller number than what's in the Seller's head?

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I've worked on acquisitions for 25 years (buy-side) and sometimes, just being patient is the only way. You should use some of the advice given here on what the real, fully loaded, after tax profit will be, but sometime the only answer is time. You have to give them time to poke around and then let them come back to you when they figured out what you stated is reasonable based on lack of interest from others. In my experience, it is incredibly common for smaller, more mom & pop or single man operations to WAY overvalue their business. Some of it is internally derived while other times it might be a ill-advised sell-side broker working outside their area of expertise.

Lots of great comments, suggestions and help posted above. Best of luck to the OP.

You can let the bank be the bad guy. The bank can ask for tax returns as proof of profitability and ability to service the loan. When the tax returns don't prove that the loan can be serviced, the amount the bank is willing to loan is reduced.

AgCPA95 said:

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Jabin said:

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You guys have done a good job in showing to the OP that a business may not necessarily be worth as much to him, as a buyer, than the Seller thinks it's worth.

But how does a buyer convince a Seller, especially a Seller that's not represented by a broker that's prepared them for the low value shock, to be willing to sell for a much smaller number than what's in the Seller's head?

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I've worked on acquisitions for 25 years (buy-side) and sometimes, just being patient is the only way. You should use some of the advice given here on what the real, fully loaded, after tax profit will be, but sometime the only answer is time. You have to give them time to poke around and then let them come back to you when they figured out what you stated is reasonable based on lack of interest from others. In my experience, it is incredibly common for smaller, more mom & pop or single man operations to WAY overvalue their business. Some of it is internally derived while other times it might be a ill-advised sell-side broker working outside their area of expertise.

Lots of great comments, suggestions and help posted above. Best of luck to the OP.

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My experience trying to buy a couple of these:

Issue #1: They want to sell blue sky. Both of the folks I talked to wanted to base the price on the business's POTENTIAL. When we put it on paper and it didn't come close to penciling out, both of them put together pro formas showing that by adding a few heads the company could start doing 10x the best revenue year in company history. It was pretty ridiculous.

Issue #2: They think they're more profitable than they are. In both cases, the earnings they wanted to discuss didn't include a fair market rate for the jobs they were performing. Only paying yourself $50k a year to do $150k worth of work is a great way to fund your growth and maybe a good tax strategy. But in a company that's doing $1MM in revenue, it can make a company look like they're solidly profitable when really they're on life support. Conversations about carving out some of the earnings to make it more aligned with reality fell on deaf ears.

Black Tooth Grin said:

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You can let the bank be the bad guy. The bank can ask for tax returns as proof of profitability and ability to service the loan. When the tax returns don't prove that the loan can be serviced, the amount the bank is willing to loan is reduced.

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I think getting a bank involved in a deal like this is a VERY good idea. They will insist on backing up their decisions with hard numbers and any gap will need to be filled by capital you bring to the deal. Not a perfect method but it helps qualify the risk a little bit.

I would also be asking him why this national brand is using him. Is it a relationship with someone there? Will that end if he is gone? Seems risky that said national brand could just decide one day to take over this themselves. With more sites acting as Marketplaces, this is more common.

Aggie1205 said:

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I would also be asking him why this national brand is using him. Is it a relationship with someone there? Will that end if he is gone? Seems risky that said national brand could just decide one day to take over this themselves. With more sites acting as Marketplaces, this is more common.

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Way back in the day, I had an uncle who owned an appliance repainting business with a big oven for curing. He picked up a big contract with Hunter ceiling fans that basically took over the whole shop and expanded. The Hunter pulled their business and went somewhere else. He went bankrupt shortly thereafter.

Side note, he was a Democrat but was shocked at how much taxes he had to pay when he started making big money.

Customer concentration is a huge risk factor.