Current range for interest rates on seller notes?

April 20, 2020

by an investor from Yale University - School of Management in Houston, TX, USA

We are working on a transaction with a small seller's note. Wondering how others in this community are setting term and rate given the current credit environment. Any suggestions or market color much appreciated.
Jeff

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Reply by a searcher
from Case Western Reserve University in Cleveland, OH, USA

Here's a recent example: "$XXX shall be paid in the form of a seller note, subordinated to the bank loan, with 6% interest payable quarterly and interest only for 2 years. Principal will be paid annually and will be accelerated to the extent cash flow coverage (available cash flow divided by fixed charges) exceeds 1.2." When I pitched, I explained the seller note, especially the interest only part, as the step I was taking in the case Covid-19 has unforecasted/unanticipated negative impact on the business results in the near term. The seller note represented 9% of my 'Sources'. I think a 6% or 7% rate would work right now.

Reply by a searcher
in Chicago, IL, USA

3-6%. Most Sellers do not focus on the interest rate. They usually fall into two camps. 1) How much cash will I see at close because I will probably never see any seller note cash. 2) They value the seller note, but are more focused on getting their note paid off in a short amount of time. If using SBA for senior debt, even the expensive banks are less than 6% interest at the moment. The banks will frown on a seller receiving interest rates higher than what they are receiving.

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