Can anyone share insights on typical seller note terms?

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 University of Southern California in 2121 Avenue of the Stars

6-9% Cash Interest, paid quarterly or monthly in arrears is standard. 3-6 year term. Amortization can be low, IO or may be subject to what your other Creditors (i.e., Mezz, Uni, Bank or SBA) allow. You could also find a way for the Seller Note to be on standby for any Cash pay based on business performance but consult with your counsel as if it behaves very much based on performance it may not be considered Debt and an Earn-Out which would have different tax implications to the Seller on proceeds & you (buyer) purchase price allocation for amortization.

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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