As the business-for-sale market adjusts to today’s high interest rate environment, seller-accommodated deal structures have become more common. Moreover, banks have tightened their lending standards and small businesses are more sensitive to higher borrowing costs. This leaves many sellers in the position of having to get comfortable with structuring the deal, including financing and earnouts, whereby the seller must ‘earn’ part of the purchase price based on performance.
“Deal structure has shifted to reflect less senior debt appetite given the higher rates. This means more seller financing and a lot more earnouts than before. The biggest shift has been the quantity and volume of the earnout in the deal…even as high as 50% in recent cases,” said Sam Scharich, buy-side director at Calder Capital.
In fact, sellers are more open to seller financing, with 24% of owners saying they will now consider it, compared to 21% last year. Of those opposed to seller financing, this year 44% say they will not offer it versus 51% last year. This is good news for buyers, 65% of whom consider seller financing either extremely or very important. Among sellers open to offering financing, 23% are willing to go as high as 50% of the purchase price.
Katrina Loftin, founder and managing partner of M&A Business Advisors explains the benefit of seller financing in today’s environment, “We are seeing a lot of buyers asking for 10-20% of seller financing with rates lower than the SBA rate the buyer is being quoted. This relieves some of the pain with rates, and sellers are obliging“.
Source: BizBuySell 2Q2024 Insight Report