What Is Owner Financing?

Seller financing is financing provided by the target company's shareholders to the acquirer. When the acquirer implements the acquisition, it will not pay the entire purchase price to the shareholders of the target company for the time being, but promises to pay in installments over a period of time in the future. This payment method is generally only used when the target company is not profitable, and the seller is eager to divest. It is a payment method that is beneficial to the acquirer. In this way, the target company must be a company with a small number of shareholders and relatively concentrated equity; otherwise, it is difficult for the shareholders to be dispersed to use commercial paper to pay in installments. The form of the seller's financing may be a seller's bill. If after the acquisition, the target company still retains the original operator, it can be in the form of the installer paying a certain percentage of the target company's performance in installments; when the performance fails to meet the predetermined standards, the acquirer has the right not to pay, so that the target company can maintain the target company after the acquisition. Under normal operations, the acquirer can avoid risks arising from the rapid decline in the performance of the target company after the acquisition. ^[1]

Seller financing

Right!

Seller financing is financing provided by the target company's shareholders to the acquirer. When the acquirer implements the acquisition, it will not pay the entire purchase price to the shareholders of the target company for the time being, but promises to pay in installments over a period of time in the future. This payment method is generally only used when the target company is not profitable, and the seller is eager to divest. It is a payment method that is beneficial to the acquirer. In this way, the target company must be a company with a small number of shareholders and relatively concentrated equity; otherwise, it is difficult for the shareholders to be dispersed to use commercial paper to pay in installments. The form of the seller's financing may be a seller's bill. If after the acquisition, the target company still retains the original operator, it can be in the form of the installer paying a certain percentage of the target company's performance in installments; when the performance fails to meet the predetermined standards, the acquirer has the right not to pay, so that the target company can maintain the target company after the acquisition. Under normal operations, the acquirer can avoid risks arising from the rapid decline in the performance of the target company after the acquisition. ^[1]

In the United States, this type of payment often results in poor profits for the company or division, and the seller is anxious to divest, resulting in a payment method that is beneficial to the acquirer. ^[2]

In the U.S., this approach also has implications for sellers

For example, when Warner Communications of the United States wanted to sell its loss-making Atari computer company a few years ago, the acquirer would buy all its equity with a guarantee of future repayments. So it has the ability to rescue the company's former Commodore International. President Jack Tramiel bought it, and will use the surplus under his effective management to repay the debt. In this case, the main reason is that Warner is very confident in Jack Tramiel's rescue plan, so he is willing to conclude the transaction by negotiable bills, and does not require the principal to be paid off immediately in the past few years. The annual cash pressure has been largely eliminated. It can be seen that the acquisition must have an excellent business operation plan in order to obtain "seller financing".