Most of the time, when one thinks about purchasing a business, people would think of going to a bank, taking a loan, and handing a cheque. The actual situation of acquisitions in business in India – particularly of small and mid-sized businesses – is, however, sloppier, closer to the human heart, and more, at least, intriguing than that.
Seller financing is one of those ideas that one thinks would be difficult on paper, but which would make perfect sense once they see it in action. And in India, it is already creeping in as one of the smarter methods of how buyers and sellers are getting transactions transacted.
What exactly is Seller Financing?
In simple terms, seller financing is where the seller of the business takes the role of the lender. The seller accepts payment over time to the buyer in instalments rather than the buyer paying the entire amount at once, directly to the seller, and there is no bank intervening.
Consider it this way, you have a desire to purchase the grocery store of your neighbour. The asking price is 50 lakhs. You have 30 lakhs ready. Rather than visiting a bank to borrow the remaining part, your neighbour will expand by letting you pay the remaining 20 lakhs over the next 3 years from the future incomes of the business. That is now seller financing, easy, convenient, and based on trust.
Why Is This Gaining Ground in India?
The business environment in India is different. There are thousands of family businesses, regional businesses, and first-generation businesses that change hands each year. Some of these transactions occur amongst individuals who are familiar with one another – by a fellow member, trade group, or more rapidly and effectively by an interaction system where serious buyers and sellers meet.
Being in the formal banking system, the banks, however extensive by nature, are yet to come to gauge intangible assets such as brand goodwill, customer loyalty, or proprietary business processes. Banks want hard collateral. But there is no loan officer who could know the value of a distribution network better than a seller who has 20 years of experience in creating one.
This discrepancy between the official credit and the fact on the ground business worth is precisely where seller financing in India gets its ground. Sellers can close that gap themselves, charge it fairly, and reach a deal that otherwise would not have been achieved.
What Are Buyers and Sellers really doing to arrange these Deals?
No template in one – and that is one of the things that have made these arrangements so flexible. The following are some of the common structures:
Deferred Payment Arrangements: The buyer makes a huge advance payment (typically 60-70 per cent) and agrees to pay the remaining part in instalment based on a specified period. The phrases – interest rate, repayment schedule, and what to do in the event of default- are all stipulated in a legal contract.
Earn-Out Clauses: This is prevalent where both parties fail to agree on valuation. The seller receives a minimum sum at the point of acquisition, and the rest of it is earned out, depending on the performance of the business after the acquisition. As long as the seller reaches some targets in terms of revenue, they will be paid more. If not, they get less. It balances incentives very well.
Partial Retention of Equity Sometimes: the seller does not entirely leave. They maintain a minor holding – 10-20% – and remain in an advisory capacity as the buyer assumes operational control. The seller has the advantage of growing in the future, and the buyer has institutional knowledge in the transition.
Revenue Sharing Models: This is where the buyer pays a percentage of the monthly or quarterly revenue to the seller until the seller pays the agreed amount. It is of particular help with businesses that have variable or seasonal income.
What to Be Wary of by Buyers.
Seller financing is not a bad idea; however, it is not risk-free. The buyer should carry out due diligence, which must involve the analysis of financial statements, concentration of customers, assessment of outstanding liabilities, and contracts. The problem may be that a vendor who is too willing to provide financing is covering up deficiencies in the business.
Always leave the agreement writing to others. Elucidate what will occur in the event of poor performance of the business. Explain the timing of the transfer of ownership. Ensure that intellectual property, licenses, and important contracts are transferred in a clear manner before or in relation to the payment schedule.
Considerations that Sellers must make.
The sellers who provide financing are virtually lending. They have even stated that the new owner will manage the business in a manner that will cover them. This implies that it is vital that the right buyer is selected not only on a financial basis, but operationally also.
A seller must examine the background, experience in the industry, and financial cushion of the buyer. References help. An elaborate buyer business plan is even better. And of course, the seller should be guaranteed by legal documentation of their right to recover the business in the event of default of payments.
Finding the Right Deal
To make seller financing in India viable, the parties must be matched to begin with, and this is where the services of platforms such as MatchValley come in. MatchValley can help to match serious business buyers and sellers together, and in this case, the conversation about the deal must be based on a solid foundation. Be it a buyer seeking a flexible acquisition structure or a seller seeking to find its way out, having the right platform on your side is all that matters.
Trust is what eventually forms the basis of business deals. And in India, trust is ever paramount over money.
