Can anyone share insights on typical seller note terms?

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October 10, 2023

by a searcher from Stanford University - Graduate School of Business in Dallas, TX, USA

Can anyone share insights on typical seller note terms, including the percentage of the purchase price, term/amortization, and interest rates? We would like to ensure that we're within a reasonable and fair range based on market trends.

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Reply by a searcher
from Duke University in Savannah, GA, USA
If you're not in a brokered process you probably have room to negotiate it back and forth a few times. I put one seller note out there in one bid that was for 2x EBITDA (as part of a larger offer) and had seven years of back-weighted amortization. I only did 5% annual interest paid quarterly but would have likely needed to go up. The seller (doctor) was going to remain with the company post-close so I felt it was important to provide a long-term seller note to keep them engaged. In my experience with doctor practices, may apply to others too, year 1 post-close performance is usually soft, so tying seller note payouts to maintaining certain revenue, EBITDA, or employment level metrics and paying a multiple or too higher than you prefer protects you better than just paying a cash-out upfront. A 5x upfront multiple can easily become 8x if the company underperforms, whereas a 4x upfront + 2x seller note multiple is technically a 6x but at least you're still performing, and if the company underperforms you don't pay out so the multiple remains low.
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Reply by a searcher
from Massachusetts Institute of Technology in Boston, MA, USA
As always it will depend on various things which are particular to the deal, industry, risk mitigation goals, negotiation etc. ...here are our respective structures for seller notes in 2 recent LOIs/deals (one completed, one in process)

10% of purchase price, 5-year term, amortized over 10 years, 5.5% interest, monthly interest-only payments for the first 2 years, 5-year balloon,
(seller negotiated down from 15% of purchase price to 10%, generally remarked that interest rate is low but agreed without any push back), ~Q3 2023

14.1% of purchase price, 4-year term, amortized over 10 years, 5.5% interest, standby for one-year, monthly interest payments month 13-21, 4-year balloon,
(seller negotiated down from 15% of purchase price and a 5-year term, and altered payment structure from two year interest only payments to the final agreed upon structure), ~Q2 2023

seller note used as a source of security for indemnification purposes, but not the sole source, subordinated to senior lender
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