Searchers! This one epic tax hack will save you $642,000 on your seller note!

Imagine closing a deal and saving $642,000 on your seller note—or at least $517,000 compared to a standard amortised note. That’s exactly what I’ve modelled using the Stanford Primer’s representative transaction (2021, p###-###-#### Here’s how you can maximise tax advantages on your seller note with a novel reweighting strategy. The Big Idea I have been thinking for a while about maximising the tax advantages on a Seller note. The premise being reweighting the principal and interest on a loan by guaranteeing targeted proceeds and reverse engineering a 30% mezzanine finance rate. You can start off with an amortised loan, simple interest annual rate or a one off simple interest on the sum of the loan and then transform the target proceeds to maximise the interest that can be claimed. I’ve built an Excel model to show you how, based on real-world assumptions. Our Assumptions I’m using the Stanford Primer’s example deal: Purchase Price: $15M EBITDA: $3M (5x multiple) Seller Note: $4.5M (30% of purchase price, 1.5x EBITDA multiple) Plus, insights from a previous Searchfunder thread: Interest Rate: 5% Loan Duration: 5 years Tax Rate: 21% (US corporate) Baseline Loan: Amortised Mezzanine Rate: 30% post-transformation (The maximum arms length rate achievable). Note: This assumes you can negotiate the seller note transformation with the seller, which may require some deal structuring finesse. How It Works Using Excel’s PMT function, the monthly payment for a $4.5M amortised seller note over 60 months at 5% is $84,###-###-#### Over 5 years, you pay $5,095,###-###-#### let’s call this target proceeds). Subtract the $4.5M principal, and you get $595,###-###-#### in interest###-###-#### % of proceeds). Here’s the magic: we reweight the principal and interest to maximize tax-deductible interest. We assign a 1.5 Mezzanine Weight (30% interest rate over 5 years) and a 1 Principal Weight, totalling 2.5 Total Weight. Scaling these into 25 units (15 mezzanine, 10 principal), we divide the target proceeds by 25, getting $203,###-###-#### per unit. This gives: Lifetime Principal: $2,038,###-###-#### units) Lifetime Mezzanine Interest: $3,057,###-###-#### units) These sum to the same $5,095,233.08, but now 60% of the payment is tax-deductible interest! Annually, that’s: Principal: $407,618.65 Mezzanine Interest: $611,427.97 The Payoff With a 21% US tax rate, the reweighted interest yields: Annual Tax Shield: $128,399.87 Lifetime Tax Shield: $641,999.37 (~$642,000) Compare this to a standard amortised note’s baseline tax shield of $124,###-###-#### The Relative Lifetime Cashflow Gain is $517,000.42 (~$517,000). That’s extra cash in your pocket to reinvest or distribute to investors! Why This Matters This model also accounts for: Deferral Periods: Relevant under new SBA rules for payment flexibility. EBITDA Penalties: A 10% EBITDA drop only affects the principal, keeping savings intact. Flexibility: Works with simple interest or one-off interest baselines (see my full model). Get the Model! I’ve shared the PDF here: https://drive.google.com/file/d/1GlwOlvvTBWkVrjKgX8LT0fZ33wgnkW5H/view?usp=drive_link Want the Excel model? Like and comment on this post, and I’ll send it your way. If this saves you an additional $517,000, I may ask for an intro to your investor network down the track? Lemme know what you think! Cheers! PS. I'm Australian. I'm not sure what other SBA rules apply. I am aware of deferral periods and I have built them into the model.