Perfect target but seller won't hold a note

December 03, 2024

by a searcher from Pennsylvania State University in Philadelphia, PA, USA

I found a perfect target but am struggling to manage seller expectations. It's a proprietary deal in an ideal industry, size, business model, geo, etc. The seller named their price which I met, but they also wanted 100% cash at closing. In a perfect world if they name their price, we get more flexibility with regards to structure. Perhaps I am a terrible negotiator but that was not the case for this deal in particular. I tried explaining why seller notes are important and beneficial, but the seller insisted holding a note wouldn't work for them. Feels like it's best to let it go for now, but I was curious if people ever waived a seller note for a seemingly perfect target? Thanks

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Reply by a searcher
from University of Pennsylvania in Charlotte, NC, USA

Thanks ^redacted‌ for the tag. Shawn, what is the importance in this case of the seller holding a note? Do you want/need them to remain involved in the business? Do you need a seller note in the capital structure because you aren't confident that you can raise the equity and third-party debt? Do you view a seller note as risk mitigation (i.e. protecting you against seller's misrepresentation, etc.)? There are multiple options for solving for each of these issues.

Similar to ^redacted‌ 's comment above, I've closed well over 100 deals as an advisor and most have not had seller financing. Good companies will attract all cash buyers at a fair valuation - not "discounted" (whatever that means.) I disagree with the view that a seller insisting on all cash at closing is a red flag. The seller often just wants no further exposure to the normal business risks of entrepreneurship, especially when they no longer control the company. They want to retire, build a new house in FL, invest, travel, start a new business, etc. They don't want residual risk. When you sell this business after 5 years (or 25) of building a successful company and you've not misrepresented or concealed anything from buyers, aren't you going to expect all cash upon closing your sale? Note that "all cash" means the purchase price is subject to post-closing adjustment for NWC and indemnity, from funds held in escrow.

Reply by an intermediary
from Rochester Institute of Technology in Toronto, ON, Canada

First, I'm going to address this from the seller's standpoint. The seller's note is beneficial to you, not the seller. In fact, if you don't have experience and you don't have money, then holding a note is a very risky proposition to them, even if the note is secured by hard assets and a personal guarantee. It's not surprising, then, that if they have other options, they will not accept your deal. "Perfect targets," as you say, will also be attractive to other buyers, some of whom will have money, experience or both. What you can do:

- Present 2 LOIs - one all-cash offer and one with a note. The one with the note should have higher total consideration, which will show the real value of the note to you then the buyer can decide based on their other options if it's worth it to them
- Demonstrate experience in the sector and offer evidence that you’re a capable operator. Show your track record, industry connections, and operational plans.
- Offer to secure the note with hard assets, such as real estate and a personal guarantee to reduce perceived risk.
- As always, the best time to ask for money is when you don't need it. Prove your financial stability upfront so that you’re not seen as relying on the seller’s capital. Consider adding triggers (such as a revenue drop) that would accelerate repayment, giving the seller confidence in your ability to pay them back.

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