Beware the Seller Who Won't Stand Behind Their Business

Why Seller Notes Matter

Let's get straight to the point: A seller note isn't just about financing. It's a vital instrument of accountability, partnership, and confidence. When sellers hold a note, they're betting on the business's continued success under your new ownership.

They're saying, "I believe in you and this business so much that I'm willing to tie my final payday to its future performance."

Conversely, when sellers refuse to consider a note, they might be telegraphing serious concerns about the business' future, or your ability to run it. Not something they're likely to tell you when dreaming of a multi-million dollar exit.

In lower-middle market deals, a seller's rapid exit might be inconvenient but manageable. There's usually a management team in place, documented processes, and enough resources to fill any gaps to ensure business continuity.

Unlike lower-middle market transactions, small businesses typically revolve around the owner. Their relationships, knowledge, and daily presence often are the business.

And that means the seller's sudden disappearance can be catastrophic.

The Lender's Perspective

Here's something that should grab your attention: Many lenders will immediately back away from deals where sellers refuse to take a note. These aren't just conservative bankers being overly cautious – they've seen this movie over and over again, and they know how it often ends.

Lenders understand that seller notes serve multiple purposes:

• They ensure the seller has skin in the game during the transition period

• They provide a financial incentive for the seller to ensure a smooth handover

• They demonstrate the seller's genuine confidence in the business's future

When a seller refuses this basic alignment of interests, lenders see it as a major risk factor. And if they're worried, you should be too.

The Reality of Seller Disappearance

Let's talk about an uncomfortable truth: Sellers sometimes just... disappear. In small business deals, this happens far more frequently than most buyers expect.

One day they're answering your calls and helping with the transition, the next they're "too busy" to respond, and soon they're completely unreachable.

Without a seller note tying them to the business's success, there's little incentive for them to ensure a smooth transition. They've got their money – why stick around dealing with the headaches of training a new owner?

Protection Strategies

If you find yourself considering a deal where the seller won't accept a note, you need rock-solid protection strategies:

First, your transition plan needs to be absolutely bulletproof. Document everything. Get all key relationships transferred. Ensure every critical process is captured in detail. Don't leave anything to chance or goodwill.

Second, develop a comprehensive contingency plan for complete seller abandonment. How will you handle each aspect of the business if the seller vanishes the day after closing? Who will manage key customer relationships? How will you access all necessary systems and information?

The Bottom Line

A seller's refusal to accept a note in the deal structure isn't always a deal-killer, but it should set off serious alarm bells. This red flag takes on even greater significance in small business acquisitions, where the owner is integral to operations.

Remember: If sellers won't bet on their own business's future success, they might be telling you something important about what they really think about its prospects. Listen to what their reluctance is telling you – it could be the warning sign that saves you from a costly mistake.

And before you proceed with this kind of deal, make absolutely certain you understand why they're refusing, and have iron-clad plans for both transition and potential abandonment. Your future self will thank you for your caution.

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