FROM MIKE'S DESK
The single most revealing line in any deal isn't in the P&L. It isn't the revenue trend, the margin, or the add-backs. It's the line that almost nobody notices until closing: the seller note.
I'll tell you why.
A couple of years ago, a buyer I was working with found a distribution business that looked like a layup. Thirty years old, strong margins, recurring accounts, owner retiring for real health reasons. The numbers penciled. The purchase multiple was reasonable. The broker's package was clean, which as you know is its own kind of warning.
He called me before he signed the LOI. I asked him one question. What's the seller offering on a note? He checked and came back: nothing. Seller wanted an all-cash deal at close. Broker said the seller was old-school and didn't do seller financing.
I told him to walk.
He pushed back. The numbers were good. The DSCR covered the debt. The multiple was under 3x. What was I worried about?
Here's what I told him. A seller who refuses to carry a note is telling you something the P&L will never tell you. One of three things is true. Either the seller knows a customer is about to leave and wants to be long gone before it hits the books. Or the seller has been running the business on personal relationships that don't transfer. Or the seller ran the business differently than the financials suggest, and they don't want to stay accountable once a buyer starts asking questions in year two.
Pick any of the three. You don't want any of them.
The seller note is the closest thing to a truth serum in a private acquisition. A seller who is confident in the business will carry 10 percent at 5 percent interest for five years. That's barely anything to them, and it costs them almost nothing if the business performs the way they said it would. A seller who flinches at that structure is telling you their confidence doesn't extend past closing day. And a seller who offers more than 10 percent without being asked, like the one I looked at this week, is telling you they want you to succeed because they want their note to get paid.
Smart buyers don't just accept a seller note. They insist on one. They negotiate the size of it like they negotiate the price. They tie a piece of it to client retention or revenue performance, because that's how you know the seller believes the story they're selling you.
My buyer walked on that distribution deal. Six months later the largest customer left and the seller moved to Arizona. The business is now worth about a third of what was being asked. The buyer closed on a different deal, a smaller one, where the seller carried 15 percent over seven years and stayed involved through the first eighteen months. That deal is up 22 percent from the closing-year baseline.
The math on a deal tells you what the business has done. The seller note tells you what the seller actually believes about what comes next. When those two stories disagree, believe the seller note.
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