Seller note terms

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by a searcher
in New York, NY, USA

10mos ago

Seller note terms

What are customary/standard terms for a seller note. Not planning on using it for equity injection purposes, rather as a source of financing and to ensure seller is invested in buyer success. Particularly curious about: percentage of valuation, interest rates, amortization periods, (full or partial) stand-by periods, balloon payments.

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reply by a lender 10mos ago
from University of Missouri in Denver, CO, USA

They are all over the place in terms of typical terms and you can have multiple seller notes with different terms on a loan. My biggest point would be to try to amortize it as long as you can to stretch out the payments as to not hurt cash flow

reply by a lender 10mos ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question. Unfortunately, there is very little limit to what you can negotiate with a seller. So long as you and the seller agree upon the terms and they work with the cash flow and financing you are looking for, the sky is the limit. If you are getting financing done, the seller note(s) has to be fully subordinate to the senior lender. As for typical terms, when financing is involved, we typically seek the seller note anywhere from 10% to 30% of the purchase price. The amount of seller note often depends on the risk in the transaction. If there is more risk due to recent growth or a customer concentration, then the seller note tends to be on the higher side. Interest rates vary and we have seen them as low as 1% all the way up to 10%. I would say most sellers notes these days are getting done in the 5% to 7% range, and are usually fixed rates. We will often see the first year or two on standby (meaning no required payments) or interest only to assist with the transition. Using standby periods can be very helpful with SBA loans because if on standby for two or more years, many lenders will not include the payment in the historical cash flow. So this will allow you to pay more for a business that is growing and not need the cash flow to work back in 2023 or earlier. As for amortizations, we have seen them amortized over a couple of years to typically 10 years. If you are using SBA financing, some SBA lenders want the amortization to match the SBA loan term. However, if you can use a balloon where the amortization is 10 years but the seller note has a 5-year term and the remaining principal balance comes due in 5 years. This would allow the seller to get completely repaid sooner but provide you and the lender a better amortization on the seller debt. We also see a lot of forgivable seller notes being used these days, especially when there are customer concentration risks or a business is growing quickly. There are creative ways you can structure these notes and still stay compliant with SBA financing. Lastly, you can have multiple seller notes. We have done multiple transactions with three seller notes, one being used to reduce equity on standby, one in repayment from day 1 and another with forgiveness in it. Again, if you can make it work between you and the seller and the cash flow supports it, it can typically get done. If you have additional questions on seller notes or need help assessing a deal, we provide a free review. You can reach me here or directly at redacted