Seller's note protections for cash flow-based hurdles

by a searcher from University of Florida

5 months ago

I am working on a deal where there is a hurdle for a seller's note. The seller would like the hurdle to be based on revenue. For example, some of the seller's note payment would not be due if the revenue for the company fell below $3,000,000. 

The bank needs the hurdle to be based on cash flow. This is because the margin has fluctuated over the last several years and to meet DSCR requirements for the lowest-margin year, the business would need to hit revenue targets it has never hit before. 

The seller is understandably concerned that cash flow can be manipulated by increasing expenses. Does anyone have examples of guardrails that can help assuage the seller's concerns?

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professional

In our experience, the seller needs to get payment based on EBTDA versus Gross Revenue to be compliant with lender requirements. That said, there can be a two tier trigger if EBITDA exceeds $XX and Revenue exceeds $YY, then borrower would pay some agreed upon accelrated payment.

3 weeks ago | like reply | 0 likes

investor from Pennsylvania State University

Would it make sense to set benchmarks based upon prior financials that would provide comfort to both the buyer and seller, and when certain revenue OR cash flow numbers aren't hit they trigger an adjustment. A "slider" that moves when each party doesn't satisfy their individual metrics. You could reverse engineer this based upon what the lender requires / needs to satisfy all parties.

1 month ago | like reply | 0 likes

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