Don’t Get A Bank Loan…How Seller Financing Actually Works | 331

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Transcript

SPEAKER_00 0:00

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. So the first thing is like what is seller financing?

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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 uh you know do a deal and buy somebody's business. And at the end of the day, we're like not gonna use the bank, we're gonna cross that out and we're gonna write seller. And so a lot of the functions that the bank would act as in terms of like um the exchange of money, having certain paperwork you have to sign, all that stuff, we're just gonna 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 uh you know uh me over here, and you know, I have a seller over here who owns an auto repair shop, franchise, or whatever, and I want to buy this business. And I I don't want to we don't want to get any bank involved. And so the the basic premise is that uh think about what you would do with the bank. So first, we are gonna come to an agreement, right? And part of that agreement is gonna be on the purchase price. It is also gonna be on the terms to say, I'm gonna buy your business, I'm gonna give you um money down. So let's say, hey, I'm gonna 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 gonna pay you, I don't know, like, I don't know, I'm just gonna make up some numbers, $3,000 a month. All right. So instead of me paying that debt payment to the bank, I'm just gonna pay it directly to the seller. So the seller gets my down payment, the seller gets my monthly payment. And in exchange, right, I am gonna get the keys to the the business. That's a key if you can't tell. Uh and so, and that's it. That's like that's essentially the entire transaction. Um, how do they not get screwed in this this whole transaction, right? And it really comes down to the same protections that a bank would. So when you when you get a loan, let me just move my little, my beautiful drawing, um, over here. Think about what do you sign with a bank? First, you are gonna have a a bunch of documents, right? So you're gonna 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 gonna pay, this is what we're gonna pay you every month, this is what happens if like we don't pay, right? All the all the bad stuff. You are gonna also sign another document with them that is gonna be uh a security agreement, which is basically gonna be all the collateral that you're gonna put up, right? That says, if I don't pay you, Mr. Seller, you I am gonna put up um, you know, obviously the business that you're buying is gonna be used as collateral. Like basically, he would get the business back if you didn't pay him because you're you're putting that up as like as collateral. If you don't have, I mean, they may look for additional additional collateral, so you may also have to put like if you have multiple locations, you might need to put uh you know, collateral up additionally on your business. They're also gonna 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 what 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 him, right? And then they're gonna have like a bunch of other miscellaneous documents uh that a you know the attorneys are gonna put together. But essentially it's the same package. And so for the seller, they're gonna have confidence, if they as long as they have 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. You 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 and and get what's theirs and what you agree to, right? And let's now kind of get into when 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. Um now it 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 I've used it often when they want a what I'm gonna put as a high um a high price. All right. Man, my handwriting's bad. Hold on, I gotta 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 were uh they they made about a hundred thousand dollars a year profit for these two locations, which is pretty low, and they were asking five hundred thousand dollars uh was the asking price. All right, which is a five X, right? Five times the profit to equal the sale price, which is like about double what it's 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've 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 gonna go and look at a number of different things. They're gonna look at the profitability of the business, they're gonna look at what's called, like, it's called a debt coverage ratio, but basically it means like how much additional um you know 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 have had to come down on her price, right? They're the only two ways to be able to get that done. And so uh we 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 mind's uh hold on, why's 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 here's how it's gonna do. 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 uh plus uh it was basically $50K a year in payments. It was $4,000 a month, so $48,000, but 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 we got this. And she was like, great, let's do it. Because she got the number she wanted, she got 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, that 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 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 $200,000 to these two stores. And that's exactly what we did. So these stores now, you know, we're still paying her every month, but these stores are crushing it. And so that was that's example number one. So you you find a seller and they have a high price that you think ultimately still could be justified. Like if like if it was like a million dollars, I I don't think I don't think I would have done it because it would have been would have been too high. But like still within reason of like, all right, I can 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 it was 12 years, 12 years of payments. And you know, we can pay it off early if we want and all that stuff. But um, and ultimately, you know, I'm gonna 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 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. This is what I love about the franchise business, is like for me to buy another location, like I have 36 of them in the in the auto repair business. Like I know it inside and out. And so I 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 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 it was $120,000, is what they were asking for this store. And it was doing about $600K in Rev and uh making uh zero zero dollars, zero dollars in profit, which you know in our business, we need like, I don't know, $750-ish K to break even. So we find a store, it's doing $600K, not making any money. I know, you know, I know if I can get the sales up a little bit, that like, you know, we'll we'll be fine. Uh and so like already, already like almost there. So for this deal, didn't want to use a bank because we couldn't, like, just couldn't, I didn't want to come out $120,000 in a pocket for a business that you know made no money, and I didn't know how long it would take me. And so we structured a deal on this one that was $20k down and uh $2,300, I think, dollars a month. And I paid him, I think it was four years, something like that. So structured deal, it's a win-win. You get he gets $20,000 down, he gets the store off his plate, he doesn't have to think about it anymore. I get into the business for just $20,000 of cash, and my payment $2,300 a month. In my mind, I was like, all right, like I gotta 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. Uh, you know, we got that that store today probably makes about $120k a year profit for us. Uh we've paid him off many man, 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 pr pretty good for, you know, I got into the whole thing for 20k down.