Written By: Wildhawk Capital
Definition: A Seller Note is a form of debt financing used in insurance agency acquisitions in which the Seller agrees to receive part of the purchase price as a series of monthly installment payments. This occurs when the agency buyer does not have the entire purchase price in cash and can only secure a commercial loan up to a percentage of the purchase price. A seller note is designed to bridge the gap between the purchase price and the amount the commercial lender is willing to finance for the purchase of the agency.
Most Seller Notes are interest-bearing loans that are fully amortized over an agreed-upon period following the agency purchase. In some cases, the agency buyer and seller may agree upon deferred or interest-only payments initially to lessen the cash flow pressure on the buyer during the agency’s transition period.
When a seller note is used, the buyer will present the seller with a written promissory note that defines the loan amount, interest rate to be paid, term of the note, along with all other negotiated repayment terms. Essentially, the seller is self-financing a small portion of the acquisition.
A Typical Example of a Seller Note Transaction:
- Agency Purchase Price – $2,100,000.00
- Buyer’s Down Payment (10%) – $210,000.00
- Seller Note (10%)* – $210,000.00
- Commercial Loan (80%) – $1,680,000.00
*A Seller note is usually the same term as the commercial loan (10 years) and the interest rate is agreed upon between the Seller and Buyer. A typical Seller Note structure today could be a term of 10 years, with an annual interest rate of 6 to 7 percent.
Benefits to the Buyer:
- A Seller’s Note is usually considered as equity in the commercial lender’s analysis for the agency acquisition. So, the larger the Seller Note, the more equity in the transaction, before your cash. If you do not have enough available cash to meet lenders required down payment amount, the Seller’s Note combined with your cash may help you reach the required equity amount.
- If the Seller is holding a Seller Note, he has an interest in your success, he will be motivated to help you with those difficult client renewals.
- There will be more security in supporting your purchase.
Benefits to the Seller:
- The flexibility of a Seller Note may aid you with the time it takes to sell your agency.
- The Purchase Price will be paid over a longer period. This may help your tax obligations, please consult your Accountant before making any tax decisions.
Risks to the Seller
- Commercial lenders will require Seller Notes to be subordinated to their financing. The analogy, your home mortgage is in the first lien position, and your home equity line of credit subordinates to the home mortgage. The Seller Note is like the home equity line of credit and will be in a subordinated, second-lien position.
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Contact:
Ed Sellers
Wildhawk Capital LLC
949-629-3312, Direct
ed@wildhawkcapital.com
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