Seller Financing - Term Life Insurance

searcher profile

April 24, 2024

by a searcher from University of Illinois at Urbana-Champaign in St. Louis, MO, USA

Hi,

I'm under LOI and going through negotiations to acquire a small company. Majority of the purchase price is being funded via an SBA loan, but we had to shift $200k to be financed by the seller. Since the seller note is on standby to the SBA loan, payments won't start on that until at least year 4.

The seller is asking that I take out a term life insurance policy for $250k with the seller as the benefactor until the note is satisfied. Is this a normal request? This feels similar to signing a personal guarantee for the seller note, but instead it's being collateralized by a life insurance policy.

I feel like the seller note should be collateralized only by the success of the business, but I'd love to hear what others think of this.

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commentor profile
Reply by an intermediary
from Harvard University in Fredericton, NB, Canada
Having Buy/Sell Agreements supported by Life Insurance Products is common between partners. Even recommended. In essence, that's what you are creating with him (a partnership), he's on the hook for the business until he's paid in full.
Term insurance is for short term liabilities. Sounds like you're buying from a prudent owner with good business practices. He sees you as a Key Person and wants you insured.
If he's also key to the success of the business, you may want to insure him as well. This would all be paid from the business.
I hope you are setting very clear expectations of roles (in writing) for the next 4 years.
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Reply by a professional
from Trinity College Connecticut in 101 Federal St, Boston, MA 02110, USA
It is not the same as a personal guarantee. Because your business is likely backed by cash flow (rather than assets), a life insurance policy on the key person is totally normal because if you died the bank would have a hard time collecting.

Also, it is not atypical to get a little bit more coverage than required. Anything greater than the loan would be payable to your family. The difference is probably $30/mo vs. $50/mo. We help searchers with these types of policies all the time and are happy to help.
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