What are market terms for Seller Notes?

August 18, 2021

by a searcher from Tulane University - A. B. Freeman School of Business in Austin, TX, USA

Hey everyone, what are you seeing in market for seller note terms (percentage of the purchase price, term/amortization and interest)? We're finalizing an LOI and want to make sure we're at a fair range.

22 Likes

134 Replies

1,418 Views

Replies

134

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

We have seen deals get funded with all sorts of seller notes. Sometimes the notes are on full-standy for a certain length of time, sometimes they are fully amortizing over a term, they can be on a longer amortization with a balloon payment that is shorter than the amortization, they can have no payments for the first year or two and then term out, they can be interest only for the first year or two or until some point in the future, and on and on. It is all about what makes sense to make the deal work and keep the seller enticed to keep a deal moving forward and still make the cash flow work for the buyer and lender(s). I would say we typically see interest rates from 0% to 6% fixed depending on the seller, industry and risk, and sometimes the interest rate is floating over the prime rate. I have seen some sellers want to earn the same the lender does. The one thing to keep in mind with seller notes is that if you have a senior lender, the seller note is likely going to have to be fully subordinated to that senior lender. Often times that subordination won't allow the seller to take any action while the senior note is current. You want to be sure the seller is aware up front that their note will need to be subordinated to the lender. No sense risking a deal blowing up later because the seller is unwilling to sign the lender's subordination agreement that will almost 100% run in favor of the lender and not the seller. If you wish to talk more about it, please do not hesitate to reach out.

Reply by an investor
from Columbia University in Dallas, TX, USA

I'm curious what trends folks are seeing. terms can be all over the place. typically not secured, but not unheard of to take security over something. interest rates tend to be fixed, not floating. Interestingly, I have seen several deals struck for longer term notes lately (say, 48 or 60 months) with interest rates that are BELOW SOFR. For lower middle market and micro deals, my view is buyers think of floating rates and complicated amortization schedules as either too much work or too complicated for most sellers to digest. I have seen a few deals lately with notes that are interest only for an initial period (from 6 months to 2 years), but that's definitely the exception. Even in deals with a large rollover component, PIK interest is pretty unusual. As far as percentage of purchase price -- that's highly variable -- usually at least 5% and rare to see more than 30-35%. Seller notes that are larger and longer-tenured are more common overall for deals with strong historical cash flows and sellers that have confidence in creditworthiness of buyer. As far as term, that's also variable, but for most deals in the last couple of years, I see###-###-#### months. You want to think carefully about how the term of the note relates to earn-out, rollover vesting, and employment term as well as any indemnification (including holdback or escrow time periods),

+132 more replies.

Join the discussion