Ways to structure seller notes to reduce keyman or customer concentration?

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December 11, 2023

by a searcher from Michigan State University in Los Angeles, CA, USA

I know keyman or customer concentration risks are major red flags but there are some good potential businesses that still have some degree of one of these two risks. What are some ways for structuring seller notes to mitigate these risks?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I have seen a number of transactions get done recently with seller notes that have some forgivable features to them if certain customers do not stay or if revenues or adjusted EBITDA drop below a certain level. This can be a way to mitigate some of the risk.

If you are using SBA financing and you have a forgivable note, in order for the full note payment not to count against debt service it needs to be on standby for 2-years. The note also has to have a standard repayment provision for the full loan amount, although the amount of that payment can always be reduced in the future based on the performance metrics built into the note. If you would like to discuss seller notes in more detail, you can reach me at any time here or at redacted Good luck structuring the note.
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Reply by a professional
from University of Miami in New York, NY, USA
Brad hit the nail on the head here!
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