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Welcome back to the Business of Beers podcast. Your daily dose of strategies, tools and tips to help you build an eight figure business. Today's episode is a clip from one of my YouTube lives. If you'd like to hear the whole thing, there's a link below in the description. Cheers.
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So the first thing is like, what is seller financing, how do we use it? And if you don't know, the easiest way to think about it is like you would normally deal with a bank to go out and get loan and get financing to then do a deal and buy somebody's business. And at the end of the day, we're not going to use the bank, we're going to cross that out and we're going to write seller. And so a lot of the functions that the bank would act as in terms of like the exchange of money, having certain paperwork you have to sign, all that stuff, we're just going to think of like the seller as being the bank. And that's the easiest way to go over it. So from the basics is let's say we have, you know, me over here and you know, I have a seller over here who owns an auto repair shop, franchise, whatever, and I want to buy this business. And we don't want to get any bank involved. And so the basic premise is that think about what you would do with the bank. So first we are going to come to an agreement, right? And part of that agreement is going to be on the purchase price. It is also going to be on the terms to say, I'm going to buy your business, I'm going to give you money down. So let's say, hey, I'm going to give you $50,000 down to buy this business. So you have a down payment just like you would in any other situation. And in addition to that, I am going to pay you. I don't know, like, I don't know, I'm just going to make up some numbers, $3,000 a month. So instead of me paying that debt payment to the bank, I'm just going to pay it directly to the seller. So the seller gets my down payment, the seller gets my monthly payment. And in exchange, right, I'm going to get the keys to the business. That's a key if you can't tell. And so, and that's it, that's like, that's essentially the entire transaction. How do they not get screwed in this whole transaction, right? And it really comes down to the same protections that a bank would. So when you get a loan, let me just move my Little. My beautiful drawing over here. Think about what do you sign with the bank. First you are going to have a bunch of documents, right? So you're going to have a note. And the note is going to be what spells out the repayment terms to say, this is how much money we're going to pay. This is what we're going to pay you every month. This is what happens if, like, we don't pay, right? All the bad stuff. You are going to also sign another document with them that is going to be a security agreement which is basically going to be all the collateral that you're going to put up, right, that says if I don't pay you, Mr. Seller, you I am going to put up. You know, obviously the business that you're buying is going to be used as collateral. Like, basically, he would get the business back if you didn't pay him because you're putting that up as like, as collateral. If you don't have. I mean, they may look for additional collateral. So you may also have to put, like, if you have multiple locations, you might need to put, you know, collateral up additionally on your business. They're also going to make you sign a personal guarantee which basically says that me, Brian Beers, am guaranteeing to make these payments, right? And that basically if I have to sell my house or if I have stocks that are other business interest, anything that I personally own, the seller could potentially come after if I defaulted on the loan and I didn't pay them, right? And then they're gonna have like a bunch of other miscellaneous documents that the attorneys are gonna put together. But essentially it's the same package. And so for the seller, they're gonna have confidence as long as they're a good attorney and they understand this stuff. But like, that they are acting as the bank. And now every single month, instead of you paying interest to the bank, you are paying that interest directly to them. They have all this protection in place so that if for whatever reason you don't pay, they can go after you. They can go after and get what's theirs and what you agree to. Right? And let's now kind of get into when does this make sense? Right? So this is part of the question of how do we get a seller to do this, right? So when now really depends. A lot of it depends on the situation itself and the specific deal. And the more you can understand about the seller, the business, their goals, why they want to sell all that stuff, the better. Okay, so first, I've used it often when they want a what I'm going to put as a high. A high price. All right, man, my handwriting's bad. Hold on, I got to fix that. So you work with a seller and the seller says, and this has happened to me, for example, there was a two franchise I was looking to buy. They made about $100,000 a year profit for these two locations, which is pretty low. And they were asking $500,000 was the asking price, which is a 5x, right? Five times the profit to equal the sale price, which, which is like about double what it was probably worth, quote unquote. Like, realistically, we like to buy. I like to buy for like two and a half to three and a half. So like somewhere around, you know, 300k ish is probably was the number that I was stuck on. Okay. And so the seller was at 500,000. They weren't budging below it. They'd been in the business for years. They're like, whatever, I can just wait. Like, I've been doing this for 20 years. What's another three years? Like, they wanted to wait me out on it. And I was kind of stuck on this number. Now a bank is going to go and look at a number of different things. They're going to look at the profitability of the business. They're going to look at what's called, like, it's called a debt coverage ratio. But basically it means like, how much additional profit over your debt payment exists every month at the current levels. And so for this one, because the asking price was so high, I would have had to come to the table with a lot of money down or to lower the debt payment, or she would had to come down on her price. Right? There are the only two ways to be able to get that done. And so, so basically I was stuck on this price. I was like, well, I don't want to pay 500. Like, it's not worth that to me. And she didn't want to sell anything less. So we like just sat on it for six months until I realized, wait a minute, like, what if. What if I could get terms that, that were like, in my minds. Hold on. Why is this thing not gone? Here we go. Terms better than the price. All right? So I went back to her and said, all right, here's how it's gonna. I will give you $500,000. Okay? But this is how we're gonna structure it. I will give you $50,000 down, and I will give you. Plus, it was basically 50k a year in payments. It was $4,000 a month. So 48,000 for round numbers. So I said, great, I'll buy your business $50,000 down and 50k a month in payments for 12 years. 12 years. All right, we got this. And she was like, great, let's do it. Because she got the number she wanted, she got the $500,000 sale price. I got into this thing for 50k down and 50k a year and I kind of thought, all right, worst case scenario, the business is making $100,000 of profit minus my 50k of debt payments, right? So like worst case in my mind we'd make 50k a year and you know, there was like, basically like a like 100% return on my down payment. So worst case in my mind I got all my money back in a year and then after that, like whatever, it's just still do. Okay. But like we were able to get, we. I was able to get her to, to, to do the seller financing deal because the price she wanted was much higher than what any bank would approve. And in my mind I knew these stores had a lot of potential. I knew that like my average store, my average store does about $150,000 a year in profit on average, a little bit more. And versus, you know, the ones we were buying were only doing 50,000. So like I was like, all right, if I could get this thing, I get my foot in the door, I can work our process. We should be able to add, you know, about, about $200,000 to these two stores. And that's exactly what we did. So these stores now, you know, we're still paying every month, but these stores are crushing it. So that's example number one. So you find a seller and they have a high price that you think ultimately still could be justified. If it was a million dollars, I don't think I would have done it because it would have been too high. But still within reason of like, alright, I can wrap my head around making these payments. If the down payment's low, that reduces my risk, reduces my cash out of pocket and we can extend this thing for as long as possible. So for me it was 12 years, 12 years of payments. And you know, we could pay it off early if we want and all that stuff, but, and ultimately, you know, I'm going to pay her. I think it's like $625,000, like including interest for these two stores. But once again, I mean they're making 150k each right now. So like it's all paid for. So that's one of Them another one. When a seller. You can get a seller to do this is when there's low to zero profit. All right? So you find a business. Same thing that you have confidence in. I think this is the big part of it is like, you have to know what you're getting into. That's what I love about the franchise business is, like, for me to buy another location, like, I have 36 of them in the auto repair business. Like, I know it inside and out. And so I can look at a store, and I don't really care if it's making money or not, because I know what I'm gonna do to it. Once we put our systems into place, okay, so you go find. You find a store, you have confidence in your ability, you trust the location, all that stuff. And once again, if there's no profit, a bank is not gonna loan on it. And in this case, it was $120,000 is what they were asking for this store. And it was doing about 600k in Rev and making $0, $0, $0 in profit. Which, you know, in our business, we need, like, I don't know, 750ishk to break even. So we find a store doing 600k, not making any money. I know if I can get the sales up a little bit, that we'll be fine. So already almost there. So for this deal, didn't want to use a bank because we couldn't. I didn't want to come out $120,000 out of pocket for a business that made no money. And I didn't know how long it would take me. So we structured a deal on this one that was 20k down and 2,300, I think hundred a month. And I paid him. I think it was four years, something like that. So structured deal. It's a win win. He gets $20,000 down, he gets the store off his plate. He doesn't have to think about it anymore. I get into business for just $20,000 of cash and my payment, 2,300amonth. In my mind, I was like, all right, I got to do what, seven grand more in revenue or something above what he was doing to, like, basically cover that payment. And so got in there, same thing, did the playbook. You know, we got that. That store today probably makes about 120k a year profit for us. We've paid him off many, you know, a couple years ago, maybe four years ago, it was less than that. I don't know. Two years ago, we probably paid him off. And this thing continues to print 120k a month, right? Not amazing, but, like, pretty good for, you know. I got into the whole thing for 20k down.