When you sell your business, it’s usually the single largest monetization of wealth of your lifetime. There are millions of dollars, and years of your life, on the line. As such, it can be a stressful time for most owners.
It mostly gets stressful because of all the various legal documents involved throughout the sales process, as well as the large amount of documentation organized in an online data room and presented to potential buyers. It’s an investment in time and energy, all while you’re continuing to run your company and achieve the goals and objectives you’ve planned for. It’s a lot for anyone to handle.
We won’t cover all of that here, and you can read our other articles that cover all aspects of an business sale. Today, we want to go over one of the least understood facets of a major business sale: the seller note.
The seller note is a key piece of any large-scale business acquisition, but it can be overwhelming to understand.
We’re going to go over what it is, how it works, and why you want to provide it to your buyers.
Let’s get started.
What is a Seller’s Note in a Business Acquisition?
The most basic definition of a seller’s note is that it’s simply a written debt agreement between the owner/seller and the buyer. Instead of paying the entire cost of the business upfront, the buyer goes into debt with the seller, making payments on the seller note until they have fulfilled the transaction agreement in full.
This is a great option for both sellers and buyers, and it opens up a number of opportunities during the transaction that we’ll cover in the following sections.
How Does a Seller’s Note Work?
Unless you’re Jeff Bezos, or someone else who has amassed an obscene amount of personal wealth, spending $10, $20, or even $80 million dollars in one lump sum is a tremendous transaction, even if you’re a successful business owner with plenty of company assets and a fair share of personal wealth. As such, the majority of people looking to purchase your business are going to be relying on financial loans or payment agreements. They’re not just going to walk into your office with a briefcase of money. This sounds obvious, but bear with us. There is a lot of complexity in deal terms, so we want to try and keep this simple and stay focused on how deals are structured leveraging seller notes.
Seller notes are a form of financing provided on behalf of the business owner selling their business to make the transaction more feasible for the vast majority of buyers. This structure also ensures the business owner who sells the company has “skin in the game” post-sale, versus walking off into the sunset to never be heard from again. The seller note helps keep the lines of communication open between the buyer and seller, should the buyer need help owning and operating the business.