Canada: The Rise Of The Seller Note

The elevated interest rates seen in Canada and many other developed economies around the world in recent years have meant that the cost of borrowing through traditional avenues has become significantly higher. Consequently, the nature and requirements of many corporate and commercial deals have become more complicated. Buyers and sellers have had to explore alternative - and sometimes innovative - ways to bridge the gap between the traditional financing available to a buyer and the purchase price being asked by the seller. One such alternative is the seller note. In this article, we will briefly discuss seller notes, their growing popularity, and the advantages they offer to both sellers and buyers in a number of situations.

Enter the seller note

A seller note (also known as a seller financing or vendor take-back financing) is a financing tool in which the seller of a business provides a loan to the buyer for part of the purchase price. Rather than relying solely on traditional financing options, such as bank loans or external investors, seller notes enable sellers to offer financial assistance directly to buyers. This arrangement typically involves the buyer making regular instalment repayments, including interest charges, to the seller over an agreed period of time.

Advantages for buyers

During a time in which the leverage available to buyers is unfortunately much more costly than it was in the recent past - and carries with it greater risk - seller notes in many instances provide a significant advantage by making it much easier to obtain acquisition financing or bridge the delta between available financing and the requested purchase price. Seller notes often involve fairly flexible terms and conditions, allowing buyers to negotiate repayment schedules and potentially avoid the stricter loan requirements often required by traditional lenders.

Seller notes also provide more opportunities for smaller-sized buyers, who may have otherwise been excluded from the deal table (ie, individual investors and entrepreneurs), to secure financing that was not previously available.

Furthermore, an intrinsic part of seller notes is that they foster closer relationships between the seller and buyer - from negotiating the financing at the initial stages of the acquisition, to gaining valuable insights and ongoing support from the seller after the transaction has occurred. This presents very significant benefits for the buyer since the parties are aligned and the seller is vested in the successful transition of the assets that are being purchased.

Advantages for sellers

Seller notes similarly provide a number of advantages for sellers. Firstly, they can help attract more potential buyers, especially when the traditional financing options available to buyers are limited or less favourable. By offering financing, sellers make the transaction more accessible, thus broadening the pool of eligible buyers. During times of elevated interest rates, sellers might be surprised by how many buyers are excluded from a deal due to the cost of borrowing. Seller notes can help remedy this.

Secondly, seller notes allow sellers to receive regular income streams from the buyer's loan repayments, creating a passive income source that might yield a higher rate of return for the seller than traditional investment sources. Spreading this income stream over time can also result in potential tax benefits to a seller.

Finally, sellers may often be able to negotiate higher sale prices when providing financing via a seller note, thus maximising the value of the target business or asset.

But take note

While seller notes offer numerous advantages, it is crucial for both parties to consider certain key factors. Sellers must evaluate the reliability and financial stability of the buyer before extending financing through a seller note. Proper due diligence and legal provisions, such as properly drafted promissory notes and registering security against collateral, can mitigate a great many potential risks. Buyers should also consider the interest rates and terms offered, and carefully assess their ability to meet their repayment obligations.

In conclusion

In today's environment of increased interest rates and financing challenges, seller notes have quickly emerged as an effective tool for sellers and buyers alike. The flexibility, accessibility, and financial benefits associated with seller financing are helping propel their rise in popularity. Sellers can leverage seller notes to attract buyers, maximise their sale proceeds, and generate passive income. Buyers, on the other hand, can tap into opportunities that may have been otherwise unavailable, and benefit from flexible financing terms.

As their use continues to gain momentum, considering and understanding seller notes can be crucial in facilitating a successful transaction and developing mutually beneficial relationships.

Originally published by Chambers Expert Focus.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.