Seller Note Security

June 17, 2019

by a searcher in New York, NY, USA

I'm working on a deal and the seller is asking for collateral to back the seller note. Curious to hear how others have handled this type of request. Did you put up the collateral or PG? Where you able to convince them to move forward without it?

Any insight would be helpful.

Thanks!

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Reply by a searcher
from University of Melbourne in Melbourne VIC, Australia

I am going to mirror what many have already said, if the owner is confident in the fundamentals of the business then the need for collateral and/or a PG only raises alarm bells. The seller note conversation needs to occur very early on in the negotiation and most sellers who have never sold a business before will need education on exactly what it is and where it sits in the hierarchy of the debt structure. Calling it what it is, 'an unsecured note' may be the simplest way of getting them to digest it early not letting it become a deal breaker post an LOI submission. It actually becomes a good negotiation tool when completing a deal as early payback, rate and amount can all be negotiated, letting the seller feel like they are having a "win". Initiate the anchor with a high %, low IR and lengthy term and work back from there. If you are a lucky, and lets be honest, luck plays a massive part in finding a great deal, the seller will be new to the concept which will give you the opening to explain to them that a high % seller note is the norm.

Reply by a searcher

Not that I have to add anything here. All the comments are great. My 2 cents is 1: Early explanation of intentions are critical before even signing an IOI in my book by which a need for PG for a Seller Note raises a red flag and gives you the opportunity to walk away (NEXT). 2: If its the best deal since sliced bread then your influencing skills need to come into play and you would have to redirect and realign the Seller to where the Security and Value really is regarding the deal. 3: At the end of the day there are many opportunities out there and you have to be consistently in a state where you can walk away. And If you are questioning walking away (When i say you, I mean indirectly) then I would be concerned about your pipeline, your deal flow, quality of your scripts, composition of advisors etc.

Thus if your pipeline is healthy, move on, don't waste time, providing you are not at LOI yet, then that would be a bit trickier. Secondly, why should you finance the financing of the finance? Think about it?

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