M&A Attorney and/or CPA Question

February 14, 2023

by a searcher from Salisbury University - Franklin P. Perdue School of Business in Virginia Beach, VA, USA

For a stock purchase- are seller notes allowed?

Scenario:
$3.6m purchase price
$1.1m seller note at 4% over 48 months
$2.5m paid to seller at closing

Due to the seller note am I automatically required to do an asset purchase?

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Reply by a searcher
from Pontificia Universidad Católica Madre y Maestra (PUCMM) in Orlando, FL, USA

Chuck, a seller note works in both type of deals, stock and asset sale. It all depends on the specifics of the deal. Being a stock purchase one would negotiate a higher seller note since the risk is higher considering that you are assuming all the liabilities and the pass history of the entity (the good, the bad, and the ugly). The entity should be able to pay the seller out of its own performance. I would've structured it this way: 1.. A bank should be able to lend you 2 months worth of revenue on a line of credit, that goes to the seller at closing; 2. A seller note paid as an earn-out of 5% of gross profit for the remaining balance until paid off. Call it a mini LBO.

Reply by a lender
from University of Michigan in Indianapolis, IN, USA

Hi Chuck, Not only is a seller note acceptable, but, from a lending perspective, seller participation/seller carryback, in conjunction with conforming equity, is a credit enhancer. Loans with seller notes perform better than those without.

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