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.