Seller note interest rates

July 07, 2022

by a searcher from Harvard University - Harvard Business School in Alexandria, VA, USA

What is a standard interest rate and term for a seller note these days? I offered 5% and the broker is telling me 10-12% is market rate right now at a 4 year term. I thought 5-8% was standard but I'm not sure if inflation/interest rate hikes are affecting expectations for interest on a seller note. Thanks!

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Reply by an intermediary
from University of Toronto in Toronto, ON, Canada

Jake's comment is spot on. In negotiations in general, different people attach different priorities to the negotiation items. For some sellers, price will be the sticking point, and they will be flexible on terms and financing. For others, cash up front is more important and would be more difficult when it comes to financing unless the terms are sweetened (i.e. the note carries a higher interest rate). While you can calculate it all in terms of hard numbers and would think that there would be uniformity, human nature dictates that each seller will be different, and that provides a latitude to structure price, terms and financing uniquely each time. The goal is to find out what makes the seller tick!

Reply by a professional
from University of Minnesota in Minneapolis, MN, USA

I'm working a deal where Buyer is getting 2% over 3 years. Granted, it's <4% of the deal price, but still, it's a few hundred grand. I thought Buyer was crazy to even try for it (Seller was asking for 5.5%), but I guess when you have a motivated Seller that otherwise has key criteria being addressed, anything is on the table. I've had multiple deals in the last year where we've had to address the concept of imputed interest because some Sellers are willing to do interest-free Seller Notes. So much can vary based on the size of the deal, the relationship between the parties, and maybe most importantly, the sophistication and expectations of Seller. Keep an open mind! Good luck!

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