Seller's note protections for cash flow-based hurdles

by a searcher from University of Florida

4 months ago

I am working on a deal where there is a hurdle for a seller's note. The seller would like the hurdle to be based on revenue. For example, some of the seller's note payment would not be due if the revenue for the company fell below $3,000,000. 

The bank needs the hurdle to be based on cash flow. This is because the margin has fluctuated over the last several years and to meet DSCR requirements for the lowest-margin year, the business would need to hit revenue targets it has never hit before. 

The seller is understandably concerned that cash flow can be manipulated by increasing expenses. Does anyone have examples of guardrails that can help assuage the seller's concerns?

0 likes
159 views
24 comments

investor from Pennsylvania State University

Would it make sense to set benchmarks based upon prior financials that would provide comfort to both the buyer and seller, and when certain revenue OR cash flow numbers aren't hit they trigger an adjustment. A "slider" that moves when each party doesn't satisfy their individual metrics. You could reverse engineer this based upon what the lender requires / needs to satisfy all parties.

1 week ago | like reply | 0 likes

searcher from Lee University

I can't remember where I read it, but this generalization made sense to me. Gross revenue is most advantageous to the seller, EBITDA most advantageous to the buyer and gross profit is somewhere in between.

4 months ago | like reply | 1 like

More on Searchfunder

Just Closed on My First Deal! Reflections and Takeaways for other Searchers

45,152 transactions are available on Searchfunder (now searchable by keyword)

Now everyone has unlimited IBISWorld access

Family office looking for traditional searchers

2 Best Ways To Find Motivated Sellers, Off-Market Deals

Examples of self-funded searcher websites

Downsides of "buying a job" below 750k+ EBITDA?

6-7x for a Self-funded Search Deal?

Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.

We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.