Need Seller Financing Advice
November 01, 2024
by a searcher from University at Buffalo, State University of New York - School of Management in Herndon, VA 20170, USA
Structuring SF with 10% down and 6-yr note at X%. What's a good rate? I want to reduce payments if revenue decreases but increase payments if revenue increases. Need advice on details, potential landmines, and how to present the offer so it makes sense to seller.
from Bentley College in Miami, FL, USA
Interest Rate and Payment Adjustments: For a 6-year note, interest rates typically range from 6-10%, depending on factors like risk and the nature of the business. Since you want flexible payments, consider a base rate that both you and the seller feel is fair, then propose a mechanism where payments adjust based on revenue thresholds. An “earn-out” style structure could also work, where a portion of each payment is directly tied to revenue performance.
Defining Revenue-Based Triggers: Clearly define revenue metrics and the intervals at which payments would adjust. For example, you might propose quarterly reviews where payments are recalculated based on performance. This way, if revenue dips, you’re not locked into unsustainable payments. Make sure these triggers are straightforward to calculate and backed by reliable accounting records.
Highlighting Benefits to the Seller: Flexibility in payments can be a great selling point if it aligns with the seller’s goals. Emphasize how this structure supports the business’s stability and helps them receive payment over the long term. Sellers often appreciate a buyer’s proactive approach to safeguarding cash flow, especially if it means less risk of default.
Potential Landmines: One risk with this type of structure is ensuring clarity on what counts as “revenue.” Gross revenue can be simpler, but net revenue might align better with cash flow fluctuations. Also, consider how changes in business expenses might impact this structure, and be ready to discuss these factors with the seller.
For more complex seller financing arrangements, it’s often helpful to have specialized advice to iron out the details and ensure both parties are protected. Platforms like DueDilio can connect you with advisors experienced in deal structuring who can help navigate the nuances and potential pitfalls of creative financing. This can ensure the structure is beneficial to both you and the seller while minimizing unexpected issues down the road.
from The Juilliard School in Danbury, CT, USA