Collateral on a Seller's note for an SBA deal

searcher profile

April 28, 2021

by a searcher from Georgetown University - The McDonough School of Business in Houston, TX, USA

I'm having a hard time working through a seller's expectations for an uncollateralized note. Any thoughts of what can be used as collateral, Obviously the SBA will require the PG and assets of the business, not sure if anyone else has come up with a creative solution.

1
13
242
Replies
13
commentor profile
Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA
Hi Benjamin, Here's my two cents and I'm speaking as both a 10+ year business broker and a past 20+ year SBA/Commercial lender. Yes, the seller wants to collateralize the seller note because he/she doesn't know if you are going to be successful in running the business and that is a risk to any creditor. I generally encourage sellers to put a second lien (behind the bank/SBA) on the same collateral the bank is using. While this doesn't provide much in the way of collateral for the seller, it helps give the seller a sense of control even though in reality the seller would have to pay off the bank loan in order to foreclose on any collateral.

Sellers are uncomfortable with seller notes because they believe (and sometimes rightly so) that they'll never get paid. While I know that bankers and buyers like to have the seller keep some "skin in the game", from the seller's perspective, they've already had 100% of their skin in the game for as long as they've owned the business! And if the business fails under the new owner's (the buyer's) leadership, the seller has no recourse except to hold the bag and not get paid. Since I don't know all the pertinent details, I'm wondering why there is a seller note? Is it because there is a lack of collateral according to the bank? Or is it because you are putting a minimum amount down? Every bank looks at deals a little bit differently and perhaps you could get some other bankers to take a look at the deal structure. I've found it helps to explain that the deal would likely not get done without the seller note. Providing, of course, there is no other way to structure the deal. Hope that helps.
commentor profile
Reply by a searcher
from IESE Business School in Los Angeles, CA, USA
I view the seller note more as a tool to align incentives than a source of funds and would generally not PG it. While the seller is naturally concerned about this amount being at risk, the seller will always have more information about the firm than the buyer, regardless of how much due diligence the buyer does, and I would be skeptical going into a deal where the seller is unwilling to provide a note without a PG. It tells me the seller is potentually unsure about the business and/or your ability to take it on. As in most things in the search world, there are few absolutes, but it would be a big negative in my mind.
commentor profile
+11 more replies.
Join the discussion