Seller Financing and Debt Payments?

All --

QQ for you on how seller financing and debt payments work.  Not sure where the best place to post this is, so giving it a whirl here.

Suppose I want to buy a business for $800k that has $200k/year in EBITDA.  The $800k purchase will be $125k equity, $275k debt and $400k of seller financing.  The question is, with the $200k of EBITDA, how is priority between debt service and seller financing normally handled?  

Does the debt service have priority?  Meaning you pay say $75k of debt service, then the remaining $125k goes to seller financing?

Or does the seller have priority and they get the $200k, then you have to service debt out of pocket until the seller is paid off?

Trying to negotiate with a seller right now, so any advice on what's normal / industry standard would be appreciated.

Thanks in advance!

Private Equity Interview Course

  • 2,447 questions - 203 PE funds. Crowdsourced from 750k+ members
  • 9 Detailed LBO Modeling Tests and 15+ hours of video solutions.
  • Trusted by over 1,000 aspiring private equity professionals just like you.

Comments (2)

Jun 6, 2021 - 3:41pm

Most deals I've seen structured as the seller financing being subordinated so service on bank debt would have priority, but you theoretically could structure it however you want. With that said, I don't really see a scenario where a bank would get comfortable not having a 1L on the assets unless you're using a direct lender and giving them a fat yield or equity upside. Also, a lot of the time I see seller notes having PIK interest with a bullet at maturity.

Start Discussion

Total Avg Compensation

June 2021 Private Equity

  • Principal (7) $694
  • Director/MD (18) $575
  • Vice President (65) $371
  • 3rd+ Year Associate (66) $270
  • 2nd Year Associate (133) $256
  • 1st Year Associate (273) $223
  • 3rd+ Year Analyst (24) $164
  • 2nd Year Analyst (60) $136
  • 1st Year Analyst (177) $118
  • Intern/Summer Associate (19) $70
  • Intern/Summer Analyst (206) $59