The current economic state has proved to be a difficult time for business buyers. Even those that should be considered qualified are having trouble acquiring a bank loan. In turn, seller financing has become more prevalent within the M&A industry and sellers are more frequently required to saddle some of the financing in order to complete a deal.
Seller financing describes a type of financing that involves the payout price being placed in an escrow account and/or the seller receiving a secured promissory note, rather than the full sum of money at the deal’s close. Subsequently, the company acts as collateral for the promissory note until the buyer has paid off the note over time, with capital earned through the acquired company. The seller will usually receive a personal guaranty and a UCC filing to secure the note.
While seller financing may not appear to be the most desirable form of financing for a business owner, utilizing seller financing may open up additional doors to buyers as well as increase the overall purchase price and provide more flexible terms. Under most circumstances, seller financing also presents the advantage of providing a tax break for the seller. In addition, the interest on the note accrues to the benefit of the Seller.
The downfall of selling a company on a promissory note, however, exists in the fact that if a buyer does a poor job of running the acquired business, it could cause the seller to lose out on a portion of the payout price. This is why it is important for the seller to make certain that they market their business exclusively to competent buyers. An M&A intermediary can assist a seller in finding appropriate and well-qualified buyers.
If the seller desires a cash payout but seller financing is the only possible form of funding for the deal, then the seller may choose to sell their promissory note. The note may be exchanged for cash, but the seller must be willing to accept a smaller amount of money in exchange for a cash payout. Many sellers choose to sell only a portion of their note. In this instance, a company may purchase a year’s portion of the note, essentially buying the first couple of years’ worth of payments. Once that time period ends, any further payments will be delivered to the original seller once again. The more the note matures with timely payments, the greater the amount an investor will pay for it.
Certain companies have been built for the sole purpose of buying business notes. Selling a promissory note is a viable option for those considering seller financing while also desiring a cash payout. Various factors may affect the purchase price of a promissory note, including the note positioning, the interest rate, and the type of business, etc. However, in time of need, many sellers choose to take this viable route.
Would you like to learn more about seller financing or the sale of promissory notes? Contact George & Company, one of the premier M&A firms in New England. We would be happy to assist you in all of your business selling needs.