How I Evaluate Debt Structures in Seller Financing Deals
When I buy a business, one of the financing tools I often use is seller financing. Over the years, I’ve learned that the structure of that debt can make the difference between a successful acquisition and a fragile one. Seller financing isn’t just about lowering the amount of cash I need up front, it’s about creating alignment, protecting cash flow, and managing risk.
Why Seller Financing Matters
Seller financing matters because it:
- Reduces the immediate cash required at closing
- Keeps the seller financially invested in the business’s success
- Provides flexible repayment terms compared to banks
- Protects against overleveraging with third-party debt
- Can smooth negotiations when valuation gaps exist
But the details of structure, interest, term length, balloon payments, and contingencies shape whether the financing helps or hurts.
My Early Mistakes
In one acquisition, I agreed to a seller note with an aggressive repayment schedule. Cash flow was tight, and I felt pressured every month.
In another deal, I overlooked a balloon payment. The note looked manageable until the lump sum came due. I had to refinance under less favorable terms.
Both mistakes taught me that the structure of seller financing must be studied line by line.
How I Evaluate Debt Structures
During diligence, I ask:
- What is the interest rate relative to market conditions?
- Is the repayment schedule aligned with cash flow cycles?
- Are there balloon payments that create future risk?
- Is the note secured or unsecured?
- Are there default clauses that favor the seller too heavily?
How I Structure Seller Financing Deals
- Negotiate flexible repayment schedules, often with interest-only periods early on
- Cap balloon payments to avoid refinancing risk
- Tie repayment schedules to realistic cash flow forecasts
- Negotiate security terms carefully to protect working capital
- Use seller notes to bridge valuation differences while aligning incentives
Final Thoughts
I’ve learned that seller financing is a powerful tool, but only if structured wisely. That’s why I negotiate terms carefully, model repayment against conservative forecasts, and avoid structures that jeopardize stability.
I continue sharing my acquisition frameworks at DrConnorRobertson.com, where I explain how I design financing structures that balance opportunity with safety.