Higher Interest Rates Create More Seller Carry

Higher interest rates when selling your business

Higher Interest Rates Create More Seller Carry

This past year has seen a dramatic rise in interest rates which has changed the landscape of mergers & acquisition deal terms. One year ago, a buyer’s offer would have a small percentage of the transaction price made up of seller carry (this is where the business owner serves as the “bank,” providing a promissory note to the buyer). Fast forward to today and buyers are making offers that include 50-100% of the transaction in seller carry.


Why So Much Seller Carry?

As of November 2023, the prime rate is at 8.5%. SBA loans currently are locking in between 9-11%. That is about double what we were seeing one year ago, which is a big hit to the buyer’s debt service.

As quoted by Brian Stephens in the Q3 2023 M&A Source MarketPulse, “Most seller notes sit behind the senior lender. In a low interest rate environment, seller notes would be 1-2 points higher than the bank note. The rationale is that if the buyer had extra money, they’d pay the seller first. Now in a high interest rate environment, that’s flipped. Sellers are offering interest rates 2-3 points lower. It’s a way to drive the value that the seller wants but keep interest down for the buyer over time.”


Advantages to Seller Carry

A business owner agreeable to seller carry will broaden their reach of buyers. More buyers bring in more offers. More offers help land the anticipated price.

By offering seller carry, the business owner is increasing their overall proceeds of the sale. The interest earned with a promissory note can be substantial depending on the rate and term of the loan.

A business owner agreeing to a promissory note is spreading out their payments over multiple years. By partially deferring capital gains from the business sale to future years, the owner will not see one big tax hit the year of the sale.  This may also keep the seller within their desired tax bracket.  It is recommended to consult with your CPA prior to agreeing to a promissory note to determine your exact tax benefit.


Disadvantages to Seller Carry

The main downside to a promissory note would be if the buyer defaults on their obligation to pay you. Depending on the agreement, with a default you keep all of the payments made to date and you get either your business back or, if your note is subordinated to a senior lender, you may not get anything back (as the senior lender will liquidate assets of value). Vetted Biz reported between 2010 – 2020 there were 588,053 small business SBA 7A loans of which 2-5% of the loans (depending on the industry) were charged off (defaulted).


When I sold my conference and event business in 2012, I agreed to a combination of cash down with a promissory note. We agreed to a term of seven years and the buyers actually paid off the note in five years as they wanted to avoid paying future interest payments to me.

When you agree to a promissory note you are telling the buyer you’re willing to work with them to get the deal done. This is especially important in this current “high interest rate” environment.  You are showing the buyer and their lender you are agreeing to have “skin in the game.” Promissory note terms can be flexible, normally lasting anywhere from three to seven years. If you and your M&A advisor are thorough when vetting the buyer and feel confident the buyer will be able to pay the full note without defaulting, the odds are in your favor that you will be successful with a promissory note.