Seller Note Push Back on Length of Note

by a searcher from Babson College - F.W. Olin Graduate School

2 years ago

A couple of times during my search I have got a lot of push back from owners on seller notes that are 5 years, the majority wanting it fully paid off in 2. 

Wondering how people have approached this part of the negotiation, particularly with SBA deals where a 2 year pay out is very aggressive?

I have struggled with it a little bit in the past and coming up with the same push back on future deals, in particular on deals without a broker. 

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searcher from Northwestern University - Kellogg School of Management

Not super experienced in the legal restrictions in the structuring - but to just a thought at aligning incentives. If his goal is to get cash sooner, you could do a longer note with an agreement that cash flows above a certain amount you want to reinvest in the business or a certain % of free cash flows/SDE goes towards paying the note. This helps him get paid faster w/o dramatically increasing the risk of default or pulling to much cash out of the business.

2 years ago | like reply | 0 likes

searcher from Harvard University - Harvard Business School

Offer what can be paid at a reasonable coverage ratio. If they want to sell the business and not have the buyer default they will value the explanation. Otherwise maybe it is not the right deal for you

2 years ago | like reply | 0 likes

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