Seller note

May 15, 2024

by a searcher from University of Phoenix in Huntersville, NC 28078, USA

Below is the seller financing section of a template LOI proposed by broker. I am trying to get the seller note as equity consideration for SBA. Am I right to assume that a balloon payment will not meet the criteria. Also, is it standard for a seller note to ask for promissory note, personal guarantee and life insurance policy?

Seller shall provide $XX of “Seller Financing”. The Seller Financing will be evidenced by a promissory note. It will have a XX-month stand-by period in accordance during which time the interest will accrue, and no interest or principal will be paid, followed by a] yy-month amortization during which time the adjusted principal and interest shall be paid monthly, with a balloon payment of all remaining principal and interest due at the end of the [term] year ([] month)] after Closing. The annual interest rate shall be ______ percent (%). The Seller Financing will be subordinated to the Senior Debt, if any. The Seller Financing is subject to approval by Seller following a review of Buyer’s credit qualifications and personal financial statement. It will be secured by the Purchased Assets, a personal guaranty of payment by the Buyer of the Seller Financing in accordance with the terms of the promissory note, a UCC Financing Statement, and a life insurance policy purchased by and on the Buyer in favor of the Seller. The Seller shall also have the right to receive the company’s quarterly financials while the Seller Financing is outstanding.]

Reply by a professional
from University of Toronto in Toronto, ON, Canada

Thanks for including me, ^redacted‌. ^redacted‌, you have good advice above re the terms of the seller note to qualify as equity, less so re the seller's request for PG, PFS, life insurance and/or security for the note. These requests to buttress a seller's note aren't standard in every situation, but they're also not fundamentally unreasonable. They may surface based on the term of the note (longer term generates greater repayment risk as a function of time), the amount of the note as a proportion of the total transaction value (i.e., how important is the seller's financing to make the deal work), and the economic cyclicality of the business (i.e., revenue risk, leading to repayment risk). In order to successfully negotiate these issues with the seller, you need to consider them from the seller's perspective: the greater the risk to the seller in any or all of these areas, then the greater the likelihood that the seller will want added protection. From my perspective, as a former bank credit executive, if I were the seller and I was being asked to provide acquisition financing via a seller's note for 10 years where my repayment would rest entirely on the ability of the new owner to successfully operate the business that I'm selling, I would be asking for these kinds of protections also.

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

If you want the seller note to be used as a portion of your required equity in the transaction, then there are a few things to consider.

1) The seller note must be on standby for two years or interest only for two years for 10% of the purchase price.

2) You cannot have any forgiveness in the seller note being used as part of your equity.

3) You cannot have a balloon payment in the seller note being used as part of your equity. In general lenders typically want that note to have a ten year term to match the SBA financing, but that is not an SBA requirement. So long as it is termed out over a reasonable term it will technically qualify under the new SBA rules.

Keep in mind you can always use multiple seller notes, One that is part of your required equity and another one that has has forgiveness or normal repayment terms. If you would like to discuss further you can reach me at redacted Good luck.

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