Most common types of seller financing structures
Our website brokers have structured many types of seller financing deal structures including standard monthly amortized payments, monthly payments with a balloon payment, performance based earn out structures and even hybrid seller financing structures that include a combination of monthly amortized payments and performance based earn out payments. To determine what type of seller financing structure is best, it's important for the website broker and seller to decide on a strategy before bringing the internet business to the market. The most common type of seller financing structures that I've seen as an ecommerce business broker is a promissory note with monthly amortized payments. For example, if the purchase price is $500,000, the seller might finance $100,000 of the total purchase price over 12-24 months as monthly amortized payments that include compounded interest. In this example, the seller and buyer could agree to take the $100,000 and divide it into 24 equal monthly payments with 4-5% interest. While monthly amortized payments is a seller financing structure that is more common among website brokers, there are also other type of seller financing structures including monthly amortized payments combined with a balloon payment, hold back structures with payments due on a quarterly or semiannually basis, and performance based earn outs.
A website broker should always strive for the monthly amortized payment structure if the seller is willing to accept any type of seller financing, but sometimes a more risky seller financing structure such as performance based earn outs are warranted if the business is not performing as well as it has in the past. For example, if a business has seen a drastic decline in revenues and profitability, the seller might need to accept a performance based earn out deal structure which involves the financed portion being dependent on the company's future performance. Our website brokers try to avoid this deal structure because it is risk for both the buyer and seller, but sometimes a performance based earn out structure is absolutely necessary. This can be risky for the seller because the seller has no control over how the buyer operates the business post transition, which could cause the total payback to be less since the payback is performance based and dependent on the company's performance. This type of deal structure is far less risky for the buyer because the total amount paid to the seller can be lower if the business does not perform as well as everyone expected. However, a website broker can help build protections into the deal for the seller by including conditions such as a monthly minimum (regardless of performance), which ensures the seller receives a minimum guaranteed amount plus the opportunity for a higher upside if the business continues to grow revenues and net profits. Our ecommerce business brokers have advised on dozens of different seller financing structures, but ultimately each business is different and it's important to establish goals for minimum acceptable deal structures at the beginning of the overall sale process.