What does seller financing entail in an acquisition?

Seller financing in an acquisition involves the seller providing a portion of the purchase price in the form of a loan to the buyer. This arrangement typically occurs when the buyer does not have enough capital to purchase the business outright or when obtaining traditional financing is challenging. In this way, the seller acts as a lender and helps facilitate the transaction.

Often, this arrangement leads to more flexible terms compared to conventional bank loans, such as lower interest rates or a more affordable repayment schedule. It also reflects the seller's confidence in the business's continued profitability, as they are essentially investing in the buyer's ability to succeed.

Options involving the buyer financing the total amount, receiving royalties, or securing traditional loans do not accurately depict seller financing, as they do not incorporate the seller’s role in providing part of the financing through a loan.