Key Points

Seller notes are a pivotal part of many mergers and acquisitions; being well informed about them will serve you greatly whether you are a seller or a buyer. Don’t have time to read this article? The following are the most important things you should know: 

• Seller notes defer part of the purchase price as a loan, facilitating acquisitions.
• Buyers benefit from easier financing and reduced upfront costs through seller notes.
• Sellers can attract more buyers and earn interest by offering seller notes.
• Family Offices negotiate higher seller notes for long-term investment strategies.
• Independent Sponsors use seller notes to bridge funding gaps in transactions.
• Private Equity firms rely less on seller notes due to access to institutional financing.
• Technology sector median seller note is 21% because of high valuations.
• Transportation deals feature elevated seller note ratios due to capital-intensive nature.
• Healthcare businesses use lower seller note percentages, reflecting industry stability.
• Business services require fewer seller notes, being asset-light and service-oriented.

Introduction

If you are in the technology sector and you are looking to sell, you should understand the ins and outs of seller notes because you are more than likely going to encounter them. A seller note is a type of financing arrangement where the seller of a business provides a loan to the buyer to help facilitate the purchase. Instead of the buyer paying in full upfront, a portion of the payment is deferred and structured as a loan that the buyer repays over time, typically with interest. There are advantages and disadvantages to seller notes for both the buyer and seller.

Buyer Considerations

Seller notes can be beneficial to buyers for a couple reasons. Firstly, the buyer is able to put down less, making it attractive to buyers with less upfront capital. Seller notes also offer more flexibility and easier financing than traditional loans. Instead of dealing with the bank, they are able to negotiate terms directly with the seller.

However, there are also disadvantages that the buyer must consider before going down this route. Firstly, buyers must meet the repayment obligations, and failure to do so can lead to default and potential loss of the business. Additionally, interest payments increase the total cost of the acquisition compared to an all-cash purchase.

Seller Considerations

Sometimes sellers shy away from seller notes due to their potential disadvantages. There is a risk that the buyer will default on the loan, leading to potential legal proceedings and the need for the seller to reclaim the business. Furthermore, sellers do not receive the full amount upfront and instead must depend on the continuous success of the company to be paid over a prolonged period of time.

Even still, there are a lot of significant advantages to offering seller notes. Firstly, the seller can attract a lot more potential buyers that may not have the capital upfront to pay in full. Your perfect buyer that agrees with all your terms may simply not be able to pay all cash. Why disqualify them when you can offer them a seller note? Not only that, but you can earn interest on the sale over the period of the term, leading to earning more in the long run than if you sold for all cash upfront. Additionally, spreading the receipt of sale proceeds over time may offer tax advantages by deferring capital gains taxes. For more information on these potential benefits, please consult your accountant.