Seller Note Push Back on Length of Note

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July 08, 2022

by a searcher from Babson College - F.W. Olin Graduate School in Boston, MA, USA

A couple of times during my search I have got a lot of push back from owners on seller notes that are 5 years, the majority wanting it fully paid off in 2.

Wondering how people have approached this part of the negotiation, particularly with SBA deals where a 2 year pay out is very aggressive?

I have struggled with it a little bit in the past and coming up with the same push back on future deals, in particular on deals without a broker.


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Reply by a searcher
from University of Illinois at Chicago in Madison, WI, USA
I always shoot for the stars with seller note on the initial offer. 10 years, 50% of purchase, etc. So far, not a single seller has entertained this… But I’ve found that if my next offer is 5-7 years, 20% of purchase. It sounds much more reasonable to them.

Would also say that this depends a bit on whether it is a brokered deal vs proprietary. I’ve founded that sellers who are represented by a broker are far more likely to take a note. In smaller deals, seller notes are extremely common. In smaller deals, sellers are also less likely to know this (or care). When brokers are involved they usually precondition the client to the idea of a note and they are more willing to accept it.

In addition, it has been helpful for me to point out the tax benefits of a longer note, avoid fully amortizing long notes (lean towards balloons). When all else fails; I .”blame it” on my lender..
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Reply by a lender
from California State University, Sacramento in Auburn, CA, USA
Robert, as an SBA lender of 33 years, I recommend to those in your situation to negotiate a 10 year amortization so your monthly payments are manageable/reasonable along with a call date/balloon at 30 months (or so). Why 30 months you ask? An SBA lender cannot refinance seller debt until it has seasoned for 24 months with all payments to the seller made on time. A balloon at month 24 does not give the lender time to refinance the note before it comes due. As such, 30 months give you time to prove yourself (financially), update your financials accordingly, possibly file the latest tax return, if necessary, and some breathing room (6 months) to refinance the debt with an SBA loan. The seller note can be P & I amortized over 10 years or interest only. Along with a 30 month call date/balloon payment, that structure is SBA debt refinance eligible.

I hope that all makes sense.

Robert
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