Often, we find, as Business Brokers, buyers who wish to buy a business wish to have a large “seller carry” in order to fund the deal. A seller carry is simply put “the seller financing a portion of the sale over a long duration of time to offset the buyers down payment or reduce the banks amount to finance”. We find that most the time it is the DEAL KILLER of all deal killers. Buy why?
Banks will and in fact do finance 90% of the deal. This of course is based on the SBA lending guidelines. The SBA is the only agency, that is government backed, that will give the banks the “feel good” to lend at such loan to value. So why would anyone want to do a seller carry note?
Seller Carry Notes
After years of experience and understanding the psychology of deal-making, we have found at Peterson Acquisitions that the number 1 reason for the desire of Seller Carry Notes is FEAR. The buyer wants the seller to be on the hook long term for what would be a makeshift “representations and warranties” that is usually found on the APA (Asset Purchase Agreement) at close. This, while adequate, takes litigation to flesh out with often no result of reward. However, if a seller agrees to a seller carry, the buyer now feels as though the seller is “putting his money where his mouth is” and now the buyer will feel more comfortable with the purchase. This works to remedy an unhealthy dose of fear, but we find it does another thing: Kills deals.
Why would it kill a deal?
I mean, after all, the seller is wanting to sell the business and if the buyer wants to own the business- the seller should want to help out the buyer and make the deal work right? One would think this, but the reality is- the seller is insulted, and this is where the deal goes south.
The old saying “its all about relationships” is a tried and true one. In the case of making deals, it is so critical. If the bank will lend 10% down for a deal, and the buyer has the funds, why ask the seller to be a bank? Its bad etiquette at best, insulting at the least.
We do see 5% seller carries, in order to fill the gap on bank financing when the bank doesn’t feel comfortable going to 90%, and in some cases a small seller carry will mend the fence. However, asking the seller to do a large seller carry when the bank will gladly go to 90% often sends the deal south. Afterall, if a business is sound and shows a history of success, why would it be necessary to ask the seller to do this? Again, fear.
Small seller carries will help the deal, but large seller financing is often the black widow, and we advise buyers to stay away from these approaches.
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