Seller Financing: how to finance the purchase of a business with the seller

Seller financing is an agreement in which the seller agrees to receive part of the price of a business after the purchase. The buyer pays a portion at closing and settles the remainder on agreed dates. There may be a combination of equity, bank credit, and deferred payment to the seller.

For the buyer, it reduces the amount to be mobilised on day one. For the seller, it can make a proposal viable, but it means remaining exposed to the risk of not receiving. The decisive point is knowing if the payment schedule fits within the available cash flow.

This article delves into one of the options in our guide to financing the purchase of a business in Portugal. The examples are illustrative and do not represent market conditions or credit proposals.

How does seller financing work?

Imagine a business sold for €300,000. Instead of receiving everything at closing, the owner agrees to receive €240,000 at that moment and the remaining €60,000 over three years. This €60,000 is the part of the price financed by the seller.

The agreement must identify who is obliged to pay, the due dates, the interest, if any, and the consequences of delays. The phased payment does not necessarily mean a phased transfer of ownership: the transfer date and the financial schedule are distinct matters to be defined in the contract.

Example: buying a business for €300,000

Consider this hypothetical structure, without transaction costs:

• Buyer's equity: €90,000.

• Bank financing: €150,000, subject to approval.

• Deferred payment to the seller: €60,000.

• Total price: €300,000.

The seller receives €240,000 at closing. If the remaining €60,000 is paid in 12 equal quarterly instalments, with no interest just to simplify this example, each instalment will be €5,000. That’s €20,000 per year, plus the bank credit payments.

Now add a cash reserve of €20,000 and hypothetical acquisition costs of €10,000. The total need rises to €330,000. If these additional €30,000 are borne by the buyer, they will need to mobilise €120,000, even though the entry price remains €90,000.

Deferring part of the price does not eliminate acquisition costs or the money needed to keep the business running. The reserve should reflect salaries, suppliers, seasonality, investment, and potential customer delays.

Seller financing, earn-out, and the entry of a partner: what’s the difference?

• Deferred payment: a defined portion of the price is paid later, according to the agreement.

• Earn-out: a portion depends on results or other future conditions. The amount to be received may vary or may not be due at all.

• Seller retains a stake: continues as a partner regarding that part of the capital, with the associated risks and rights.

For example, paying €60,000 over three years is different from paying up to €60,000 if certain objectives are met. A transaction can combine both mechanisms, but the contract must separate fixed amounts, conditional amounts, and calculation criteria.

When does it make sense?

Seller financing deserves discussion when there is a difference between the cash available at closing and a price both parties agree upon. It can also help preserve liquidity during the management transition.

It is particularly important to understand if the business will continue to generate cash without the former owner. Who maintains the business relationships? Who takes on daily management? Are there customers who may leave with the change? An accompanied transition can be helpful, as long as roles, duration, and remuneration are defined separately.

The seller may prefer to receive everything at closing for personal or financial reasons. This preference alone does not allow for the conclusion that there is a problem with the business.

What to negotiate before accepting phased payment

Prepare a proposal with clear answers to these questions:

1. How much is paid at closing? Separate the entry, the deferred amount, and any variable portion.

2. Who owes the money? Identify the buyer and the contractual debtor, without assuming that the acquired company automatically pays for its own acquisition.

3. When is each payment due? Define dates, frequency, and any grace periods.

4. Are there any interest charges? Indicate the rate, calculation base, due date, and treatment of interest during the grace period.

5. Is there a large final payment? Show where the money to pay it will come from, without relying solely on future refinancing.

6. What protection will the seller have? Discuss guarantees and default mechanisms with legal support.

7. How does it relate to the bank? Clarify whether the lender requires priority, subordination, or limitations on payments to the seller.

8. What information will be shared? Agree on a reporting frequency sufficient to monitor compliance.

These are preparation points for negotiation, not a contractual template. The legal and tax solution depends on the operation, including whether shares, assets, or a business establishment are acquired.

How to test if the business can support the payments

Do not use EBITDA as if it were fully available cash. Start from a cash flow forecast that considers taxes, investment, working capital needs, and management remuneration. Then include all capital and interest payments.

A simple test, with fictitious numbers: if there are €55,000 available annually before debt service, the bank requires €30,000 and the seller €20,000, there will be €5,000 left. A €15,000 drop in available cash turns this surplus into a deficit of €10,000.

Compare at least one base scenario and one more demanding scenario. Test delays in receipts, loss of a key customer, and an unexpected repair. If payments can only be made when everything goes well, review the price, the entry, the deadlines, or the amount of debt.

What are the main risks?

For the seller: delivering the business and not receiving the full balance. A higher nominal price, paid over several years, must be compared with the term, remuneration, and risk assumed.

For the buyer: accumulating payments incompatible with the operation. Deferring alleviates the closing, but creates future obligations that compete with salaries, suppliers, and investment.

For both: leaving undefined the criteria for an earn-out, the role of the former owner, or the response to default. Expectations must be aligned before closing the purchase. Seller financing does not replace due diligence.

Frequently asked questions

Is it possible to buy a business in instalments?

Yes, if the seller agrees and the operation is properly structured. There is no buyer's right to demand this modality, nor a universal percentage of price that should be deferred.

Does seller financing always have interest?

It depends on the agreement. A proposal should clearly state whether there are interest charges and how they are calculated. The interest-free example in this article serves only to illustrate the mechanics of payments.

Can it be combined with bank credit?

It can be integrated into the same structure, but the institution must accept the relevant conditions. Do not count on both financings as assured before confirming their compatibility.

Is it possible to buy without own money?

Deferred payment does not guarantee a purchase without capital. Even if a large part of the price is postponed, there are still acquisition costs, cash flow needs, and lender criteria.

Does the seller remain the owner until everything is received?

Not necessarily. The timing of the transfer of ownership and the seller's protection rights depend on the contract and the chosen legal structure.

How to take the next step

Start by exploring businesses for sale. In a deal that meets your criteria, confirm directly with the seller if they consider phased payment and under what conditions. Do not assume this availability when the listing does not indicate it.

Before making a proposal, prepare four numbers: price, available equity, the amount you propose to defer to the seller, and necessary external financing. Add costs and cash reserve. To organise the remaining steps, consult the guide to buying a business in Portugal.

Informational content. The structure should be validated by a lawyer, accountant, and involved financiers. The Comprar Empresa does not grant credit nor guarantee financing approval.