M&A Legal Tips And Best Practices: Importance of a Seller Note

As a risk mitigation tool, I love seller notes. The seller note is a portion of the purchase price paid to the seller.
It's also called seller financing or seller carry. They all mean the same thing.

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For example, if I'm buying a business for a million dollars and I get an $800,000 loan and contribute $100,000, that extra $100,000 could come in the form of a seller note with different terms attached.

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I like that as a risk mitigation tool because it helps align incentives. It incentivizes the seller to assist with the transition because they still have $100,000 outstanding.

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Or any dollar amount out there that the seller will likely not get paid unless the business continues successfully.
It's subordinated to the SBA debt, meaning it is second in rank behind the SBA debt or any senior debt. It encourages the seller to cooperate with the buyer.

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We love aligning those incentives long-term.

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If something goes wrong with the business, we push for an ability to offset the seller note.

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For example, if I have a $100,000 seller note, I will put language in the purchase agreement that states if something goes wrong after closing, that's the seller's fault and a breach of our agreement, I can deduct that loss from the amount I owe the seller.

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If I don't have a seller note and the same situation arises, now I've incurred a $50,000 loss because of something the seller did.

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Now I'm calling the seller, asking for that money back. The seller, who may be on a beach in San Diego, might not be quick to get back to me.
It's easier to negotiate when you still have some of the seller's money in your pocket.

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