A seller carry back is when the seller agrees to finance your business acquisition by holding part of the price of the purchase to be paid at a later date. Usually the seller will expect some type of guarantee that they are going to get paid back as well as an interest rate for "borrowing" their money over time. What's great about seller carry backs is that every part of the term is negotiable. An example of how seller carry backs maybe advantageous to you is that you maybe able to get 0% interest financing. Now tell me what bank (other than a teaser rate on a credit card) would be willing to give you money at 0% interest! I firmly believe that seller carry backs should be used in almost all existing business purchases because it incentivizes the seller to help you succeed. If you owe the seller a lot of money - they don't want you to fail in the business, they want you to succeed and payback the money you owe them. Wouldn't you want someone who owes you money to be able to pay it back?
Here are a few ways to influence your seller to give you a carry back on the purchase price of the business.
1. Commit the seller to your success! This means that very early on in your business negotiations you need to commit the seller to making sure you are successful. Most sellers genuinely are - however there are a few sellers that are trying to pawn their business off on unsuspecting buyers who don't know any better. During one of your first discussions or negotiations of the seller simply use this statement: "I need to know you are committed to helping your potential buyer in this business sale be successful. Are you committed to helping me be successful?" Now be very quiet. Say absolutely nothing to the seller. If there is silence - don't be the first to talk! This is really hard for people. You are trying to establish the seller's commitment to your success. When the seller speaks - write down exactly what they say. You will use this later in your negotiations. Most sellers will say some form of yes. Either answer is okay - so don't worry.
2. Determine the right price- Pricing a business truly is more art than science. I've seen business appraisers use comparables from businesses in different geographic markets, different sectors, and different methods. Business appraisals can be valuable but they should never be used as your determining factor on what the business is worth to you. For a seller carry back to be effective, you have to peel all the layers on the onion and get to what the seller's bottom line price is. This takes time, patience, and strategy in negotiations. Please remember that the seller carry back is only good when you are at the lowest purchase price the seller could possibly accept. I've had business brokers try to get me to incentivize the seller by paying more than the listing price (or more than the lowest price the seller is willing to take) by doing a carry back. This is not an effective use of the seller carry back for you, the buyer. Remember the listing broker's job is to get the highest price for the seller - not the best buy for you.
3. Know what you will need to be successful - Regretfully business buyers put more effort into other aspects of business acquisitions than just determining what they will need to do to make the business work for them. After buying this business is the take home earnings enough for your time? Is the cash flow predictable enough to quit your day job? Are you psychological and emotionally prepared to buy a business? Is your family prepared to not see you for several days because you're trying to help their future? These questions need to be answered by you and no one else.
4. Recommit the seller to your success- Once you've determined the value of the business (to you), the right price (for you), what you need to be successful - then you need to go back to the seller. Simply state "Mr. Seller, I'm very impressed with your business. In order to make this business purchase go well I need you to carry back X of the purchase price at X percent." This is where your salesmanship comes in. You need to focus on your seller's commitment to making you successful. You don't need to tell your seller how you came up to the seller carry back amount you just need to tell him or her that you really can't survive on less than $100,000 a year or that you really don't need the carry back you just want the seller to be invested in your success.