Big red flag if a seller isn't willing to provide any financing?
September 07, 2023
by a searcher from Harvard University - Harvard Business School in New York, NY, USA
September 07, 2023
by a searcher from Harvard University - Harvard Business School in New York, NY, USA
from University of Pennsylvania in Atlanta, GA, USA
I will give you an example where it was not a red flag for me.
$1m ebitda industrials business, 50-50 owned by 75 year old husband and wife who had founded the business 40 years ago. Their 52 year old son had been President of the business for 20 years, did not have an ownership interest but got above market comp ($350k).
Over 4 hours of dinner/drinks with the son, it emerged that his mother had recently been diagnosed with cancer. The parents wanted to sell and distribute the proceeds into estate planning vehicles for him and his two siblings who had no involvement with the business.
The sellers were not interested in dealing with a 5-year cash flow stream that the mother may not even be around for, and I didn’t see much point in insisting on a seller note from 75 year old absentee owners who probably knew less about the business than their son.
In this case, I made an all cash offer and handled risk mitigation / incentive alignment through the consulting agreement with the son.
Other valid reasons for refusing a seller note could be divorce or dissolution of a partnership.
Try to go deep on the reason they don’t want the seller note. If you don’t get a rationale that gets you comfortable, then yes walk away. On the deal above, I’m glad I didn’t make it a non-negotiable during the first conversation with the broker.
from Virginia Polytechnic Institute and State University (Virginia Tech) in Blacksburg, VA, USA
I also wouldn’t take the broker’s word for it. I’ve had a number of brokers tell me that the seller categorically won’t carry any paper. Every time I’ve pressed, they’ve always caved. However, I don’t always press. Until recently bank financing was actually a better option….longer amortization with comparable rates. These days….not so much.