Deal Structuring 101

Not all deal structures are created equal!

(and for good reason)

By Stephen Mariani

A prospective buyer submits an LOI or offer to purchase on one of your listings but it contains some contingency’s and caveats that may be concerning to you and the seller. I’m sure we have all experienced this but what are the basics and the “must haves” and why? Who assisted them in determining these items? Google? Today’s newsletter will go through a few of the many reasons we see (and sometimes request) seller notes structured in certain ways along with other creative items that aren’t necessarily in the deals best interest. Why, in many times, I request 2 separate seller notes, some inventory be put on consignment or even possibly a portion of receivables included in the sale.  We discuss the differences between them along with explaining the effects each has on the potential buyer’s application and subsequent approval.


Let’s first address the down payment requirements as we need to be sure the loan request is eligible. We should all know by now that SBA requires 25% cash injection (down payment) on all business acquisitions that include 500M or more of “intangibles”. The most common cause of a seller note is to assist a specific buyer with his cash injection. If this is the reason for the inclusion of a seller held note in the offer to purchase then it MUST be on full stand by for 24 months of more (by SBA rule). The amortization table is negotiable with the lender and a credit underwriting determination. I am personally against seller financing as I can find no benefit for my client, the borrower, unless it does assist in the down payment aspect and allows the transaction to actually happen (then I’m for it).


What is the purpose or reasoning behind a second seller note? Here are the 2 items that cause me to structure a loan with two. The first should be more obvious to the M&A market as it is to bridge the gap between our maximum loan amount of 5MM and the total project cost to close the transaction. This can be for a higher business selling price where all can agree to make a 5MM loan work. The second, and much more common on main street deals is to either correct a previous year cash flow shortage by reducing the annual debt service or allow the seller to receive more compensation from larger new contracts or future business in the future. An example would be what we all thought of in the past as an “earn out” clause with the repayment based off only the future gross revenues. When structuring it for this purpose a lot of other considerations need to be considered and I won’t go into details in this letter but may in the future. Since the SBA disallowed “earn outs” the only way for the seller to receive additional funds would be to increase the selling price with the second promissory note but have that note be “forgivable”. Meaning, if we do not hit X amount of gross revenues than Y amount of that second note is “forgivable”. I used this method many times since the no earn out rule came into play. Just as an FYI—it is not as easy as it may sound.


The offer may include “some” amount of receivables and mostly as an option to reduce some operating capital amount from the loan. When I include any amount of receivables in the transaction purchase it is typically to reduce the amount I am providing to a specific borrower. The example would be a true business to business sale. If the A/R terms basically begin at 30 days and their gross revenue is high, it equates to a high amount of required operating capital. Depending on that amount I will have three options of replacing that capital. I can include operating capital in the loan (which I always do), request additional cash injection form the buyer or the seller leaves a portion of receivables in the company post closing. In many times if the requirement is very high it will be a combination of all three. Typically lenders do not like to provide an amount of operating capital that will exceed a borrower’s down payment and that’s when it gets tricky and a combination may be best.


The last item I use just a few times a year is when there is controversy surrounding the inventory. Many times the buyer and seller cannot agree on obsolescence or the amount required to truly support operations. At this point the buyer has done his due-diligence, had his professionals review the information and he has determined the “correct” amount of inventory levels and does not want to pay for too much or obsolete inventory. Here is the work around that I have used for years. Put it on consignment. That’s right, let the seller become the vendor if he believes this inventory will be sold in just a few months. The contracts can include language stating the buyer will sell “that” inventory first prior to purchasing additional as long as the product is the same. In some cases we have even portioned off a small section of the warehouse and considered that the “sellers” portion of inventory. This serves 2 purposes as I see it and both are very important. The first is that this buyer should NOT want the seller leaving with the excess inventory as he would then be selling it as a competitor or selling at a discount which also hurts our buyer’s sales. My second consideration is to always do right for both parties which is why I will always explain to our clients that you need to help the seller with this inventory. It is in all party’s best interest to either sell it for him or buy it upfront from him. This is just another way to bridge the gap between buyer and seller.


The most important consideration when experiencing any of the above items is to understand who and why this particular structure is being considered. Many times I see these added in under advisement from an accountant or attorney as a method of seller “skin in the game”. As I stated before, I see no reason for a seller note as I do not see it as a benefit either cash flow, seller cash from closing and even broker commissions. It doesn’t help anyone if the seller has skin in the game if we aren’t completely comfortable with the business to begin with. There should be NO amount of skin that removes proper due diligence or makes up for any portion, a buyer gets comfortable and understands the business he is buying OR he does not and walks from the deal. The sellers note should not be the difference. My typical statement to almost every buyer is that on the day of closing you NEED to be 100% comfortable with this business acquisition and if you are not then you either walk away or get comfortable (which I do not recommend the day of closing—preferably during due diligence). Let’s all stayed focused as business sales continue to increase and as always, we are here to answer any questions you might have regarding business acquisition financing. is always available for specific questions regarding this or other SBA rules.