SBA question - personally guaranteed seller note?

April 15, 2024

by a searcher from Washington University in St. Louis in New York, NY, USA

I'm negotiating an LOI for an SBA deal and the seller has asked for a personal guarantee on the seller note. Am I permitted to personally guarantee a seller note in the SBA structure? Is that market? (For additional context -- I'm funding the deal with 20% cash, the seller note is not being used as part of my required equity contribution)

Thanks

3 Likes

17 Replies

379 Views

Replies

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

PG on Seller Note is common, especially if the amount is significant. As others have said, Seller Note is subordinate to the lender. So, if the buyer defaults with the lender, clearly Seller does not get paid. However, what if buyer is good with the lender, but does not pay the seller? That is when PG will come into play depending on other clauses. In most, or majority, of cases, senior lender does not allow junior lender to call default w/o their permission. In this situation, I think, as a non-lawyer, the PG has no value. However, avoid a killer clause called Confession of Judgement in Seller Note in one of threads on Search Funder.
https://www.searchfunder.com/post/confession-of-judgement-vs-sellers-notes-dont-do-it

Reply by a searcher
from University of Rochester in Dallas, TX, USA

You should not agree to this. The best feature of the Seller Note, beyond as a source of transaction funding, is that it keeps the seller invested in the deal and aligns interests. If the business fails, he loses a bunch of money. If you guarantee it, and he thinks he has recourse outside of the business, he won't care as much of the business survives or fails and might be more inclined to exaggerate in diligence or be less helpful post-close. Also, most seller notes get negotiated down in exchange for early payment, so this could further complicate that.

+15 more replies.

Join the discussion