5% Seller Note on Full Standby

April 08, 2023

by a searcher from Brigham Young University in Vineyard, UT 84059, USA

Hey Everyone,

I'm looking at a company where I only have a 5% down payment for the loan and would prefer to not bring in investors. However, I'm worried that the seller will back out of the deal if I ask him to carry a 5% note on full standby.

One option I'm considering is offering a price that is 2-5% higher so that the seller receives more upfront value to offset the full standby note.

Any other options I should consider?

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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

The % depends highly on the strength of the company, buyer, and the attractiveness/competitiveness of the transaction. According to the quarterly Market Pulse published by the M&A Source, the average over the last four quarters across all size ranges from $1 mm to $50 mm is 10-12% (SF + earnout), normally amortizing. Depending on the strength of the business and buyers, most lenders are looking for 0% to 10%, perhaps 15%-20% if the business cash flow isn't covering their debt service coverage ratios.

^redacted‌, to your 5% life-of-loan standby question, I think your approach is on point. As long as it appraises, if you offer a few % more, compared to getting negotiated a few % below with other buyers, the seller is going to be net neutral.

Reply by a searcher
from Texas A&M University in Johnson City, TN, USA

What is your term, 10 years? You can point to a "high" likelihood of interest rates dropping back down in the future, and a refi gets him paid up.

You might find that being up front with the seller about your motivation for these terms actually helps you. A seller that is invested in you as their Buyer will want to help you get deal done. Many sellers will understand (and support) your desire to be sole owner.

Do you loose anything by asking for the standby with whatever your initial price idea is?

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