Question re: Structuring a seller financed deal

October 03, 2022

by a searcher from Babson College - F.W. Olin Graduate School in Boston Metropolitan Area, MA, USA

Hello all,
We are in deep negotiations of a seller-financed LOI. Its a $3+MM EBITDA, $12MM asking price manufacturing opportunity. The seller is holding a note for most (if not all) of the asking price because of his specific capital gains situation. However, he is concerned about being the majority lien holder and have a bank in front. So, how do we address any future situation requiring a bank loan such as future equipment purchase or LOC, prior to the seller note being paid out? In that case, I am assuming the bank (even with a smaller amount than the seller note) becomes senior to the sellers note, true? Is there a way to get around this to satisfy the seller's concern? Thank for any thoughts on this.

Reply by an investor
from Fort Lewis College in Denver, CO, USA

If the seller is originally in the senior debt position, no subsequent bank (lender) could put themselves in a senior position to the seller. Now, you might make a future equipment purchase that you finance and the lender takes a lien on that new equipment. That equipment would not be part of the sellers collateral, but it wasn't part of his/her collateral to begin with anyway. The bigger question in my mind is related to any debt funding (LOC) need you might have in the future. That lender would have to take a junior position, so your options will likely be more limited and expensive.

Reply by a searcher
from College of William and Mary in Bethesda, MD, USA

I can appreciate the seller’s concern. Usually the lender in the second position has a risk adjusted rate to account for their position. Another option could be adding covenants that match the bank lenders terms and including a clause that allows the seller to step in cure any issues jeopardizing his/her lien position.

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