Bank loans for buying Internet businesses are more difficult to obtain then for a brick and mortar business, which can stymie the ability of prospective buyers to invest in new businesses. If you’re selling an Internet business or hoping to purchase one, the restrictiveness of lenders doesn’t mean that you’re completely at the mercy of banks. Buyers can still purchase Internet companies with numerous owner financing agreements.
With owner financing, the seller agrees to turn over the business for less than the full purchase price. Then, the buyer settles the obligation in the future. There are various methods of owner financing that can be used when selling an Internet business. The most common types are:
- Straight Financing – In a straight financing agreement, the buyer makes a down payment on the purchase price. The rest of the loan is then repaid in equal monthly installments for a certain period of time. As a very basic example, if the cost of the business was $500,000, the buyer might pay $400,000 and then make 36 monthly payments of $2,777 to pay off the remainder of the loan.
- Straight Financing with Balloon Payment – This type of financing is similar to straight financing in that there is a down payment made and then several equal monthly payments to be made afterward; however, the loan then matures and the buyer makes a final large payment. With the above example, the buyer may pay $400,000 toward the $500,000 loan and then make two years of $25,000 payments, paying another $50,000 back. Then, he or she would make a final payment of $50,000 to the seller in year three.
- Performance Based – With a performance based transaction, the amount that the buyer repays per year is based upon how much money the business earns in the form of profits each year. The contract will specify a down payment and then a percentage that must be paid out of the net profits on an annual basis. Usually, there is a maximum and a minimum amount required with this type of arrangement. With our ongoing example, let’s say that the buyer makes a $400,000 down payment on $500,000 business. Then, he or she agrees to pay 25 percent of the annual net profits with a minimum of $25,000 and a maximum of $200,000. The business does really well and makes $250,000 its first year. The buyer would then pay 25 percent of those profits or $62,500 to the seller. If the business were instead in the red, they would still pay $25,000. Performance based pricing usually is for 1-3 years after the buyer purchase the businesses or reaches the maximum threshold.
- Holdbacks – Seller financing with a holdback is usually used when the buyer has the funds necessary to purchase the business but does not want to pay all of the money upfront because they have concerns that the seller might not deliver on his or her end of the deal. In this instance, the buyer provides a portion of the selling price at closing and then agrees to pay the remainder within 30, 60 or 90 days, provided the seller meets certain obligations. Usually, the holdback payment is placed in escrow to protect the interests of the seller.
An Internet business broker can help you determine which type of seller financing is ideal for your individual financial circumstances. He or she can also advise you as to what type of collateral you can use to protect your interests.