Thread by @sbabmarks

90% of transactions have a SELLER NOTE

This 🧵might just protect you:

I want to share some Pros and Cons of Seller Notes.

Then some relevant facts

Followed by a real war story

Seller Note/PRO’s
🔹 Buyer has a fallback position in case you don’t get what you thought you were buying (see story at end)
🔹 The note will keep the seller engaged during the transition period
🔹 The note can lower the Buyers equity injection

🔹 The note will lower your senior lender’s exposure
🔹 Depending on the terms and the conditions, it may be beneficial for debt service coverage
🔹 Stay away from the word “adjustments”. The SBA does not recognize this word, but you can establish triggers for “performance”

Should these performance metrics not be met, then the seller note can be placed on “full standby” for the life of the SBA loan

Seller Notes/CON’s
🔹 often times, the Seller Note has a shorter amortization than the SBA loan
🔹 The seller may want to charge a higher interest rate

🔹 Both of the above can have a negative impact to debt service coverage
🔹 often times sellers do not even want to take a note which may affect the overall structure of the transaction itself
🔹 The seller note may keep the seller engaged too long for the buyer

OTHER FACTORS
🔹 A seller may remain with the business as a “consultant” for no more than one year
🔹 A seller may never “roll”any equity because the acquisition must be for 100% of the small business concern
🔹 Stay away from the words “forgivable seller notes”.

The price is the price and there can be no adjustments post closing even if it is for the benefit of the borrower!

🔹 all the above would affect “eligibility” and as I posted previously, this is the number one issue a lender must look at when assessing a loan

🔹 A lender will look at the seller note carefully! Ultimately cash flow is king and this will dictate the final terms and conditions of the seller note!

WAR STORY - Seller Note

Several years ago, I made a loan to a buyer who purchased a paper recycling business.

The business had a number of large assets like a baler, hauler, large trucks and large green trailer bins to place the paper waste in.

The company used its trucks to pick up the paper waste, bring it back to its facility, shred it and then bundle it.

They would then sell these bundles back to the paper Mills for recycling

About a month after the acquisition, the buyer gets a call from a customer inquiring when they were coming out to pick up the container now full of paper.

The buyer, now the new owner, was speechless as he was not even aware of this stop nor the location, let alone that there were assets at this site.

He went back to the original purchase and sale agreement to look at all the locations listed and this location was not on the list.

He then started to wonder were there any additional locations that might have been left out.

He started to do more due diligence, asked the existing employees and went through the sellers records and found out that they were several more stops that were not included

All in all he uncovered that there were 6 additional locations, bins, containers and equipment that he never received.

He reached out to me and we discussed what his recourse would be, and of course, it was the seller note!

After our discussion he called his attorney, who immediately wrote a letter to the seller stating that they were in breach of the contract and unless they fully disclosed all of the locations where the assets were, that all future payments to the seller would immediately stop.

The buyer further discovered that the seller actually had intentions of keeping those six locations and assets for himself.

Eventually they did work things out, but only because there was a seller note in place and something to go against.

This is just one simple example of why a seller note should really be considered as part of your negotiations.

If the seller is hesitant to take a seller note, this may be a red flag. I hope you have found value in this tweet.

If so, please like, share and retweet.

You can follow me @sbabmarks and stay tuned for next Saturday for another war story!