Seller: "How do I know that you won't screw me over on the seller note?"
June 16, 2021
by a searcher in Tampa, FL, USA
Have a good working relationship with the seller so far in the process (pre-LOI but getting closer to exclusivity) and just had the conversation where the Seller posed the question "How do I know that you won't screw me over on the seller note? How can I still have control over getting my deferred purchase price payment? What if you take over as majority owner and make terrible decisions that tank the company and my deferred sale purchase price payments are put in jeopardy?"
What are various ways that are incorporated into sale structures that address the seller's concerns about receiving the remainder of the purchase price? Also, what are some talking points that I can use to go back to them to alleviate any concerns that they have?
*seller is going to get 53% of the purchase price at closing and then 23.5% at end of year 2 and the remainder at end of year 4.
**seller is going to remain in business for a minimum of 2-years post-transition (mutually agreed upon between us)
from Texas A&M University in Johnson City, TN, USA
a few of his related videos to topic:
https://www.youtube.com/watch?v=CzbU6DCLsVo
https://www.youtube.com/watch?v=YhEs5CG3uGs
This is good original question, I have seen on a few offers and many discussions. My short answer to Seller has been "covenants" when this comes up in general, early on.
Since Anonymous O.P. didn't specify SBA vs non-SBA, will post in general. Distinguish between complete failure (if seller believes this, then they shouldn't sell to you, or they will anyway with no intent they ever get the seller note portion) and you succeeding but just "screwing them over" on the seller note (meaning you pay banks back, but not seller).
You could try assets as collateral, stock pledge, life insurance, restrictions on your salary, restrictions on distributions, PG, etc. to increase Seller comfort with note.
Good ref on this, half way down page: https://mediamergers.com/seller-financing-basicsa-primer-for-buyers-and-sellers/
They could also tie the non-compete provision to full payment of seller note.
Quick idea- you could propose an escrow for the web domain itself too, tied to the seller note. This is something that relates directly to brand and goodwill (see David's video on the seller note relating to goodwill).
If you do an earnout (or forgivable seller note with ties to historical earnings in case of SBA), then same Seller concerns. Make sure your performance metrics are easily understandable/verifiable (not subjective), good points above by ^redacted
Lastly, you can point out to them that the last thing you want to do it get sued. If you are successful in paying off bank, achieve the performance metrics, you will be happy to pay the seller every penny! If you don't pay, then the opposite of the failure case (see Barnett video point on not likely to get sued if you're broke), you will have assets for the seller to go after, which should put them at ease.
SBA has their special rules on control- covenants on Seller note have to play with their rules.
from Duke University in Tulsa, OK, USA
The Seller note is also a vote of confidence that the Seller believes you can take control of the business and operate it successfully. Part of purchasing the business should include a transition/training period so that the Buyer learns the nuances of the business. If the Seller isn't confident you can successfully run the business then you should thank the Seller for their time and look elsewhere.