What are normal market rates for seller financing?

September 27, 2023

by a searcher from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA

I'm prepping an LOI for a property services business. $1.8MM asking price, $650K SDE. Suggested offer by broker includes 10% seller financing (which feels like it's on the low side of normal) at 12% interest rate (which feels high) for 5 years.

Does anyone have an opinion on current market ranges for seller financing? Interest rates, % of deal, term, or anything else.

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Reply by a searcher
from Harvard University in New York, NY, USA

There's a big difference between variable rate and fixed rate seller notes. 12% if variable (tied to prime or other index) doesn't seem far off for the added risk of being second position behind the bank. The "expectation" for interest rates in the US from Sep 2023 is that they will go up a little more, level off and then start to slowly tapper down in###-###-#### months, so over a###-###-#### year period your average interest rate on a variable loan would be much lower than the starting rate if that were to happen. Conversely, a fixed rate is baking in these expectations into a rate, 5-8% range seems reasonable for what I'm seeing there. One other point I'll bring up, many seller notes are done at lower interest rates because the note is partially solving for valuation difference of buyer and seller. Look at your deal objectively and see how much is straight deferred payment for fair valuation vs you think the business should sell for less and the seller thinks the business should sell for more and this is a bridge. The larger the gap, the lower the interest rate I would push for as a buyer.

Reply by a lender
from University of North Carolina at Wilmington in Wilmington, NC, USA

Hey! ^redacted‌ and I are happy to chat with you regarding seller and structure. A 10%-15% seller note is pretty standard for small businesses. For the interest rate it can be all over the map but they are typically lower than your Sr. Debt lender. We've frequently seen 6-8% right now. I don't know that I've seen 12%. 5-10 years is standard as well. And you can usually negotiate an interest only period. You can do quite a bit with the seller note especially if you understand what risk you're trying to mitigate with it. Happy to chat through the structure with you. Reach out - redacted or redacted

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