How Did You Finance a Deal with Seller's Carry?

November 09, 2020

by a searcher from Thomas A. Edison State College in Cincinnati, OH, USA

I am currently working on financing a deal that is under LOI. The seller and I would like the seller to keep around 10% of the equity in the business so that he can benefit from the upside of the company. Unfortunately, this is an asset light company that would normally be financed through SBA. The SBA requires the seller to sell 100% of their equity. Has anyone run into this type of situation, and how did you ultimately finance the transaction? Thanks in advance.

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Reply by a searcher
in Washington, DC, USA

Financing a deal where the seller wants to retain equity can be challenging when using SBA loans due to their requirement for the seller to sell 100% of their equity. Here are some alternative strategies that others have used to navigate similar situations: Non-SBA Financing Options: Conventional Bank Loans: Some banks may offer conventional financing that doesn't have the same restrictions as SBA loans. You can negotiate terms that allow the seller to retain equity. Private Lenders: Consider working with private lenders or investor groups that are more flexible with deal structures. Seller Financing: Increase the seller-financed portion of the deal to cover more of the purchase price while allowing them to retain equity. Equity Buyout Agreement: Create a formal agreement where the seller’s equity is purchased over time, post-closing. This arrangement can be structured to align with company performance or specific milestones. Holding Company Structure: Establish a holding company that owns the operating company. The seller can retain equity in the holding company, which holds indirect ownership in the business. Ensure this structure is compliant with legal and tax regulations. Convertible Note: Structure the seller’s retained equity as a convertible note. The note can convert into equity at a future date, post-SBA financing compliance period, allowing the seller to benefit from the company's upside. Deferred Equity Grant: Offer a deferred equity grant or options that vest over time, ensuring compliance with SBA requirements at closing while providing future upside to the seller. Mezzanine Financing: Use mezzanine financing as an additional funding layer. This option often allows for more flexible terms, including equity-like participation for the seller. Equity Partners: Bring in an equity partner who can provide the necessary funds and is open to the seller retaining a minority stake. Family Office or Angel Investors: Approach family offices or angel investors who may have fewer restrictions and can structure the deal creatively to accommodate the seller's equity retention. Alternative Loan Programs: Explore other loan programs that do not have the same restrictions as SBA loans, such as local economic development grants or programs. It might be beneficial to consult with a financial advisor or attorney who specializes in mergers and acquisitions to ensure compliance with all regulatory requirements and to explore creative structuring options.

Reply by a searcher
from Claremont McKenna College in Los Angeles, CA, USA

I think seller roll is a great tool to encourage a seamless transition and encourage any sellers that are staying on to continue giving the business their all. It aligns incentives well. There are plenty of lenders that work with lower middle market businesses. I have supported a business as small as $1.5M of EBTIDA receive financing. Without knowing the industry and EBTIDA of the business its a bit hard to say how well you can get financing but most lenders have no problem giving a quick leverage read and to see if its a fit.

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