Why a Seller Note is Crucial for a Successful Business Acquisition

Are you an #entrepreneur looking to buy a business? Have you heard of the importance of a seller note but need clarification on what it is or why it matters? If you're considering an #sbaloan to finance your business acquisition, you need to know the value of a seller note. This article will explain how a seller note can help you secure the funding and why it's a critical component of a successful #businessacquisition .

When purchasing a business, the seller's confidence in the company and commitment to the new buyer's success is essential in obtaining an SBA loan. Because of this, #sba lenders view a seller note as a vote of confidence from the seller that they believe in their business and will have a vested interest in the new buyer's success.

A seller note is a loan provided by the seller to the buyer. It represents the amount of the purchase price that the seller agrees to finance themselves rather than relying entirely on the SBA loan. This seller-financed portion of the acquisition typically ranges between 10-20% of the purchase price.

The benefits of having a seller's note cannot be overstated. By financing part of the acquisition, the seller has skin in the game and a vested interest in ensuring the buyer's success. This alignment of interests is crucial to the long-term success of the business.

The terms of the seller note can be negotiated between the buyer and seller but will ideally match the repayment term of the SBA loan. Most seller notes, except those on "standby" (more on this later), can be repaid monthly with interest and become a form of an annuity for the seller. The seller may agree to a lower interest rate or a longer term than the SBA loan, which helps with the overall debt service coverage ratio (DSCR) and can help make a deal work.

The ideal structure of a business acquisition is an 80% SBA loan, 10% equity injection from the buyer and 10% seller note. With this structure, the buyer can leverage the power of the SBA loan while still demonstrating their commitment to the business by investing their equity. At the same time, the seller note ensures that the seller remains invested in the business's success and will work with the buyer to ensure that they succeed.

One strategy for minimizing the buyer's equity injection when purchasing a business is to negotiate a seller note on full standby. In this scenario, the buyer may only need to provide a 5% equity injection, rather than the typical 10%, as long as the seller holds a 5% seller note on full standby. The buyer must refrain from repaying this type of seller note during the life of the SBA loan. SBA lenders are most open to this structure when the business buyer is a key employee of the company being sold.

At LoanBud, we understand that purchasing a business can be complex and overwhelming. That's why we're here to help. We work with our clients to ensure they are well-versed in all facets of acquisition financing and help secure the funding they need to succeed in their business acquisition.

If you're an entrepreneur looking to purchase a business and need help securing an SBA loan, contact LoanBud today. Our team of experts will work with you every step of the way to ensure you get the financing you need to make your business dreams a reality.