An Acquired Taste Before you buy that business you're craving, consider seller financing to sweeten the deal.

While negotiating the purchase of Anywear Shoe Co., a Seattle based manufacturer and distributor of professional footwear, Tim Johnstone had experience on his side. A former division manager for a large bank, he was on the due-diligence team that analyzed companies the bank wanted to buy-skills that proved invaluable when assessing his own acquisition prospect four years ago. In fact, his thorough analysis revealed some troubling facts about Anywear Shoe Co., including a wrongful termination claim by a former employee. "The value of the business to me was lower because there were so many uncertainties about how those issues would be resolved," says Johnstone.

So Johnstone, 52, took aggressive steps to protect his purchase. First, he asked the owner to finance 55 percent of the multimillion-dollar deal, insisting on a "holdback" that permitted him to deduct from the loan any undisclosed liabilities or claims against the company. The owner would also receive part of his payment in the form of an earn-out based on the company's performance. It was a grueling negotiation. The owner frequently changed his mind not only about the company's value, but also about providing financing. But the owner, who was having health problems, had to either accept the conditions or risk losing a viable buyer. "If we had not used seller financing," Johnstone says, "the deal probably wouldn't have come together."

It was successful planning on his part. A customer had filed a $120,000 lawsuit against the company, which Johnstone didn't learn of until the plaintiff called to settle two days before the court date. By then, Johnstone had also stumbled across some financial irregularities. The previous owner had no choice but to renegotiate the sales terms about 14 months into the deal. "There's always risk when buying a business. Having seller financing not only gives you additional comfort, but also some protections that you otherwise might not have," Johnstone maintains. "It turned out to be the smartest thing I ever did."