Would the seller of a business sell their note for a 20% discount?

November 19, 2022

by an intermediary from University of Georgia in New York, NY, USA

Something like 80% of SMB transactions include seller financing. Sure, the seller is happy to receive steady payments over the next 5 years, but I have to imagine a lot of them just want their money and to get out.

Is there a market to buy the remaining cash flow from sellers? I know the new owners wouldn't be thrilled to have the seller out of the business, but I (buyer of the note) would be incentivized for the owner to keep making payments (succeeding).

Buying these notes is huge in RE, but curious if anyone has seen these transactions happen in the SMB space! Thanks in advance for any color.

Reply by a searcher
from Ivey Business School at Western University in Toronto, ON, Canada

I can’t comment on your SBA question, but purchase agreements should have language that preclude the seller from assigning/selling the note, as it would defeat the main purpose of the structure. What I mean by this is, with business acquisitions, I’d argue most times the main purpose of the note is to align incentives and allow for a smooth transition. Whereas with real estate transactions, I’d imagine that a note is used mainly for financing purposes, hence why the market for buying these notes is more common.

Reply by a searcher
from Texas A&M University in Johnson City, TN, USA

I would consider these a pretty risky asset category in many cases. Interesting concept though.

Why would the Buyer not do a bank refi to take this discount their self? I'm currently working on something like this for one of my own deals. Would you get stiffed by some sellers that want to avoid reps and warranties set offs, coming business issues, etc? I'm sure you would. Any liquidation scenario a likely mess compared to simple RE foreclosure.

20% not enough, would need to be much higher I think.

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