LOI advice - Asset light, business services, no seller financing
May 08, 2024
by a searcher from United States Naval Academy in Concord, NC, USA
Does anyone have advice or examples on best approach for structuring an LOI when seller will not entertain seller financing and business is asset light, business/consulting services (low start-up costs)? I am concerned with not having seller financing as a tool to help mitigate risk.
from University of Notre Dame in New York, NY, USA
1. You can do a partial buy-out in a stock sale -- to offset the potential liabilities you'd be assuming, build out more substantial indemnifications in the purchase agreement. There's also less of a tax benefit for the buyer in a stock sale, but in an asset light business, it might be minimal and it actually makes your offer stronger to the seller b/c their tax treatment is more favorable.
2. Post-Closing Consulting Agreement - You can "move" some of the purchase price into a post-closing consulting agreement with the seller that is commission based and contingent on the business capturing certain levels of customer revenue. You can essentially structure the "targets" in the agreement similar to earn-out targets and it's a work around for SBA rules because its not part of the purchase price.
from University of Michigan in Detroit, MI, USA
As for ways to structure the LOI, what financing options are you considering (apart from the seller note)?
If you plan on using SBA financing, you have limited options. For example, you cannot rely on an earnout, which would otherwise be the obvious choice. yet under the recent rule changes, you could ask seller to retain an equity interest post close (the downside is you would have to structure the deal as a stock purchase).
Freed of SBA constraints, you have more options. But I would still revisit that initial question: Why no seller note?