Does the seller need to seller finance a portion of the purchase?

For the vast majority of the acquisition loans we do, the seller doesn’t finance any portion of the purchase.

Sellers “can” seller finance any amount of the purchase with a promissory note but have to subordinate that note to the lender’s note.

What is a Pro forma?

Pro forma, a Latin term meaning “as a matter of form”, is a forecast, not a guarantee: The pro forma is a prediction of how the combined business will perform after the acquisition. It's important to acknowledge the inherent uncertainties and build in reasonable assumptions.

Focus on key financial metrics: The pro forma should include detailed projections for revenue, expenses, profits, and cash flow for the combined business over several years.

Be realistic and conservative: Avoid overly optimistic assumptions, especially about cost savings and revenue synergies. Underestimating challenges can lead to problems down the line.

What are the primary examples of when seller financing may be needed?

W2 advisors, advisors without production, and advisors whose practice has too low of a value compared to the seller practice value being acquired.

If the deal isn’t cash flowing strong enough or the lender has other concerns about the deal, the lender may require the seller to finance a portion of the purchase. In these cases, a 10-25% seller note is the typical percentage the lender would require.

Do all seller promissory notes have to be subordinated to the lender?

For bank financed deals, both SBA and conventional, the lenders we work with will require the seller to subordinate the promissory note. It doesn’t matter if the bank is financing a minority or majority of the purchase price, a subordination letter will be required for most every acquisition loan.

The lender provides the subordination letter that must be executed by the seller. However, our lenders do not require any previous seller notes to be subordinated if there isn't a lien filed.

In virtually all cases, lenders require that the seller note be subordinated to the lender. This means the seller is in second position behind the lender. It doesn’t matter if the seller is financing 5% or 95%, the subordination is required.

Some sellers who are financing a majority of the deal may not like being in second position to a lender who is financing less than they are. While this is understandable, it’s just the way it goes in commercial lending.