Great Deal, with no seller note

November 19, 2024

by a searcher from Murdoch University in Chicago, IL, USA

I am acquiring a HVAC company ($1.8M EBITDA) at a very attractive 3 x multiple but the seller wants an all cash deal. He said he would stay up to 4 years after the sale to run the company but wants no seller note and no equity retained. There are no red flags in the deal and the financials are reviewed.

I can contribute 30% to the purchase price but I'm wondering how the banks would see the deal given that there is no seller note? Do banks do these types of deals? Thank you.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I would confirm some of what has already been said. Many banks prefer a seller note is involved to be sure the seller is engaged, but it is not a requirement. However, it is not a hard requirement and if you have enough equity down you can get away without it. The bigger concern is verifying how you will maintain the licensing post closing. Does the seller have the required licensing to operate or are there others in the organization that can maintain that licensing. Also, if you are doing an SBA 7A loan for the acquisition, you cannot guarantee the seller more than a one-year employment agreement and that agreement has to be on a 1099 basis. This can impact the licensing requirements in some states where the person who holds the license has to be a salaried employee.

If you would like to discuss further you can reach me here or directly at redacted

Reply by a professional
from University of Michigan in Detroit, MI, USA

Hi Anon, a seller note is the best risk mitigation tool out there when it comes to SMB M&A. We occasionally work on deals where there is no seller note. But it is the exception. But everything is about risk/reward. And you know your risk tolerance more than anyone else. That said, your lender may have a problem with this deal for two reasons. (1) As you flag, your lender may want to see some seller financing--it will depend on the variables that go into the lender's risk rubric. (2) If you're looking to rely on SBA financing, the longest the seller can stay involved in the business post close is one year (unless the seller retains equity). Hope that helps. Feel free to reach out with any questions redacted

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