Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How Seller Financing Lifts a Business Sale Multiple
Transcript
- Lucas: So Luna, we've looked at a lot of deals on this show where the headline number — the EBITDA multiple — seems to tell the whole story. But every so often, the real story is hiding in the financing structure. Luna: Give me an example. What are we digging into today? Lucas: A commercial printing business in the Pacific Northwest. Revenue around four million dollars, EBITDA around eight hundred thousand. By the usual comps in that industry, it's a seven-to-eight-times business, maybe nine if everything's perfect. Luna: Let me guess — it sold for double-digit? Lucas: Eleven times EBITDA. Just under nine million dollars. And the buyer wasn't a strategic with synergies, wasn't a private equity firm with cheap capital. It was an independent operator who paid a premium because a big chunk of the purchase price was structured as a seller note. Luna: Ah, so the seller financed part of the deal. That's the classic tool for bridging a valuation gap. Lucas: Exactly. In this case, the buyer put down about sixty percent in cash, and the seller carried a note for the remaining forty percent — roughly three point six million dollars — payable over six years at a fixed interest rate. Luna: And that's what pushed the multiple up. Because the seller is literally putting their money where their mouth is. Lucas: Right. The buyer's rationale was simple: if the seller is willing to take back a note and be repaid from future cash flow, that signals confidence. It reduces the buyer's downside risk. If the business underperforms, the seller shares some of the pain. Luna: So the buyer is essentially paying a premium for that risk transfer. Lucas: Precisely. And I've seen this again and again. When a seller accepts a note, buyers are often willing to stretch the multiple by one to two turns — sometimes even more if the note has a long enough term and a reasonable interest rate. Luna: Let's talk about the mechanics, because I think a lot of owners hear 'seller financing' and immediately think 'I'm just waiting to get paid.' How does it actually work? Lucas: So the seller note is just a loan from the seller to the buyer. The buyer pays part of the purchase price over time, typically with interest. The note is usually secured by the business assets, sometimes by personal guarantees from the buyer. Luna: And the interest rate? I'm assuming it's not the cheapest money out there. Lucas: Right. In today's environment, with rates where they are, seller notes are often priced in the eight to twelve percent range. The seller is taking on risk, so they want compensation. And the buyer is willing to pay it because it's still cheaper than mezzanine debt or equity dilution. Luna: But here's the thing that trips up a lot of sellers — the note is only as good as the buyer's ability to pay. Lucas: That's the risk, absolutely. You're not just selling your business; you're becoming an unsecured lender to someone else's operation. If the buyer runs it into the ground, you might not see the back half of your money. Luna: And that's why some brokers I've talked to tell sellers to be cautious about seller financing. It's not free lunch. Lucas: Look, it's a trade-off. You're trading some certainty of cash today for a potentially higher total price. But if the buyer is solid, and the business fundamentals are sound, it can be a fantastic outcome. Luna: And it can also be a useful tool when the buyer simply can't get traditional financing. In this credit environment, a lot of independent buyers are struggling to get SBA loans approved. Lucas: That's a great point. The SBA route is still there, but it's not always smooth. And a seller note can fill that gap, making the deal possible at all. Luna: So you're telling me a seller can often get a higher multiple by simply offering to finance? That seems almost too good to be true. Lucas: Well, it's not guaranteed. It depends on the buyer's perception of risk. A buyer who's paying all cash may demand a lower price because they're taking on all the risk. But when a seller shares that risk, the buyer can rationalize paying more. Luna: And that's exactly what happened with the printing business. The buyer walked into the negotiation expecting to pay around eight times, but the seller's willingness to carry a note changed the whole conversation. Lucas: Exactly. And the interesting part is the note's structure was designed to protect the seller. It wasn't just a simple promissory note. There were covenants around capital expenditures, a minimum cash balance, and the buyer had to maintain certain performance benchmarks. Luna: So the seller was effectively saying 'I'll help you buy this, but I want to make sure you don't run it into the ground.' Lucas: Yes. And that's a smart approach. It aligns incentives. The buyer has to keep the business healthy, or they risk defaulting on the note — which could trigger personal guarantees or even put the business back in the seller's hands. Luna: That's a powerful lever. A well-structured note can give the seller a lot of oversight without having to stay on as a manager. Lucas: Speaking of which — I know this is a bit of a shift, but we should mention something. If these conversations have moved your work forward in some small way, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It's what keeps this show ad-free and independent. Luna: Yeah, it's a small way to keep the lights on. And we appreciate anyone who finds value in these real-world deal breakdowns. Lucas: Right. So back to the printing business — the seller structured the note with a balloon payment at the end. That gave them a stream of income for six years, plus a big lump sum at maturity. Luna: That can be a great retirement plan, if you can stomach the risk. Lucas: Exactly. And for some sellers, the tax deferral is a huge benefit. You spread the capital gains over several years, which can keep you in a lower bracket. Luna: I hadn't even thought about that. So it's not just about the multiple — it's about the net after taxes and the timing of when you actually see the cash. Lucas: That's the real takeaway. A seller who understands the financing landscape can dramatically improve their outcome. The multiple is just the headline; the structure is where the real value is locked in. Luna: So what's the takeaway for a typical owner listening? If you're thinking about selling, should you proactively offer seller financing? Lucas: I'd say this: don't bring it up on the first date. But when you get to the letter of intent stage, be open to it. It can be the difference between a deal that closes and one that falls apart. Luna: And if you're a buyer, it's worth asking for — you might be surprised how often a seller is willing to take a note to get the deal done. Lucas: Absolutely. And in a market where acquisition financing is still tight, seller financing is becoming a key tool for independent buyers. It's not just for distressed deals or hard to value businesses anymore. Luna: So, bottom line: the printing business sold at 11 times EBITDA because the seller was willing to trust the buyer and the buyer was willing to pay for that trust. Lucas: That's it. And it's worth remembering next time you see a deal that seems to defy the comps. The price might be telling you more about the financing than the business.