Our Seller Won't Finance. Red Flag?

March 25, 2024

by a searcher in San Francisco, CA, USA

We recently went under LOI after submitting 2 offers: one at $2.9M all SBA, and another at 3M with 10% seller financing. Our lower offer was accepted; is it a red flag that our seller won't carry a note for the higher purchase price? They had disclosed they weren't interested in seller financing in the CIM, but I'm still concerned that they know something about the future of the business we don't. As a note, this is a non-recurring revenue business so predictability of cash flows is fairly challenging.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question. It is not uncommon for sellers not to want to carry a seller note. However, the fact they are not willing to carry one at a higher purchase price is a bit strange. Honestly, there is not really anything for them to lose in carrying one, unless they just want to be done with the business and not have the worry about it anymore. As a general rule we recommend seller notes on all deals because it gives the seller another enticement to work with the buyer in the transition and gives the buyer an immediate clawback should a rep or warranty be violated. As a general rule when a seller is not willing to carry a note back on any transaction it is normal to ask a question on why. But in this case when they can only benefit, it is strange.

I am not sure if this helps you at all, but just trying to give you my perspective. I have not idea what is going on in their mind.

Reply by an intermediary
from University of Texas at Arlington in Fort Worth, TX, USA

When a seller is not interested in carrying a note, it doesn't necessarily indicate a red flag about the business's future. The seller's preference to avoid seller financing, as disclosed in the Confidential Information Memorandum (CIM), suggests that this decision is more about their financial strategy or personal circumstances rather than the business's health. Seller financing entails not just confidence in the business but also in the buyer's ability to maintain and grow the business at similar or better margins and performance levels. Therefore, the seller's reluctance could be more about their risk tolerance, liquidity needs, or other personal financial planning objectives rather than hidden issues with the business.

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