Deal Structure for Seller's Note

searcher profile

October 11, 2019

by a searcher from University of Pennsylvania - The Wharton School in Philadelphia, PA, USA

We're looking at a couple of deals where the seller is willing to hold a small note. These are smaller acquisitions ($1M EBITDA), and we want to use SBA thus we want the seller to hold as big of a note as possible.

Can you share any deal structure or negotiation strategies that have worked for you in the past to get the seller to hold a larger financing note?

thank you!

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commentor profile
Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
If you are pursuing an SBA loan, and the bank is willing to do 75% to 90% LTV, then you only need the seller to carry 10-15%, with your down payment of 10-15% (10% buyer down payment is policy minimum, although there is a scenario where buyer puts in less if seller lends the remaining portion of the 10% minimum on a life-of-loan standby. Most buyers should not expect this unless the rest of your offer, your experience, and your credit are stellar. From the seller perspective, besides the risk of what the buyer may do with the business that is out of their control and beyond what the business was capable of when they turned it over, what drives them to not want to put in more seller finance than what is needed by the bank to make the deal work is that they (i) need to pay selling costs and some taxes (e.g., depreciation recapture taxes are due the period the loan closes regardless of the cash received at closing), (ii) may be looking for some cash at closing to buy something/spend on something that they have been putting off until retirement (well deserved beach house, travel, contribute to grandkids' college funds, etc.), and/or (iii) are trying to diversify their net worth as they enter retirement.
commentor profile
Reply by an intermediary
from California State University, Los Angeles in Sacramento, CA, USA
The deal structure relates directly to the buyer's ability and the sellers flexibility.
What does seller want? Do they want all money now or do they not need it all now?
Do they want to earn interest on seller carry or not? Do they want to have structured sale to spread taxes over next few years?

For an SBA structured deal or not...what if seller carried all the paper minus some cash down payment? That's great plan as you don't need to deal with SBA. Give seller same terms and no time and no prepayment and no origination fees etc.

If a big piece of the deal needs to be fronted with a loan, SBA or not, it still depends on borrower buying power. I provide capital options to buyers to show them all their options, be they SBA big bank, regional bank, or alt capital sources.
These are rough brackets for possible structures:
90% loan and 10% cash down
80% loan 10% cash and 10% seller
50% loan, 40% seller carry and 10% prior cash injection from buyer.
etc and so on.
If you want to walk through your deal to know more... happy to educate and not push my services at all.
thanks
Dan
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