Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Family Offices Use Sell-Side Financing
Transcript
- Lucas: So there's this quiet corner of family office finance that barely gets talked about, but it's becoming a go-to move when you're selling a business and you don't want to wait for the check to clear. I'm talking about sell-side financing. Luna: Sell-side financing? I've heard the term, but I'm not sure I've ever seen a clean explanation of what it actually is. Lucas: Right, so let's set the stage. Imagine a family office that runs a manufacturing business worth fifty million dollars. They've decided to sell, but they've got their eye on another asset — maybe a real estate portfolio or a minority stake in a private equity fund — and they need cash now, not in six months when the sale closes. Luna: And they can't just borrow against the business the normal way? Because it's about to be sold? Lucas: Exactly. The business is the collateral, but once it's sold, the lender loses their security. So traditional asset-based lending gets awkward. Sell-side financing is a specialized loan that's repaid from the proceeds of the sale. The lender structures it around the expected sale price and the closing timeline. Luna: So it's like a bridge loan, but for people who are exiting a company. Lucas: That's the shorthand. The key difference is that the lender does deep diligence on the sale process itself — the purchase agreement, the buyer's financing, the regulatory approvals — because their repayment depends on the deal closing. Luna: And what's the typical structure? Are we talking about a line of credit or a term loan? Lucas: Usually it's a term loan with a maturity that matches the expected closing date, often six to twelve months. There's typically a commitment fee, an interest rate that's a few points above SOFR, and sometimes a contingent interest feature where the lender gets a share of the upside if the sale price exceeds a certain level. Luna: That's interesting. So the lender shares in the upside, which aligns incentives a bit. Lucas: Exactly. That's why it's called sell-side financing — the lender is effectively betting on the sale happening, and they want the best possible price. They might even help the family office evaluate offers, because a higher sale price reduces their risk. Luna: So what kind of family offices actually use this? Is it just the mega-wealthy, or does it trickle down? Lucas: It's most common with offices that have a concentrated asset — a business they've built over decades — and they want to diversify before the sale closes. Think of a founder who wants to lock in a real estate investment or fund a new venture, but they don't want to wait. The loan lets them act now. Luna: And the lender's perspective — who are these lenders? Are they banks or specialized funds? Lucas: Banks are sometimes involved, but more often it's private credit funds or specialist lenders who understand the nuances of M&A. They're comfortable with the one-off nature of these deals, and they can move faster than a traditional bank credit committee. Luna: So what's the catch? There must be some downside. Lucas: The obvious one is that if the sale falls through, the borrower is in a tough spot. The loan still needs to be repaid, and they might have to sell other assets or refinance at a higher cost. That's why lenders underwrite the sale process so carefully — they want to be sure it's likely to close. Luna: And there's also the risk that the sale price comes in lower than expected, right? Then the loan might not be fully covered. Lucas: Right. Lenders typically cap the loan at a percentage of the expected net proceeds, often seventy to eighty percent, to leave a cushion. But if the sale price drops, the borrower might need to bring cash to the table to cover the gap. Luna: Is there a scenario where the loan becomes a wealth-building tool beyond just liquidity? Like, is it ever used to fund a new acquisition before the sale closes? Lucas: That's actually a common use case. Let's say a family office is selling their core business for a hundred million, but they have a chance to buy a smaller competitor for twenty million. They can use sell-side financing to fund that acquisition now, rather than waiting for the sale proceeds. Luna: So they're essentially leveraging the future sale to grow their next chapter. Lucas: And in that case, the interest cost is just part of the acquisition math. If the new asset is going to generate a return that exceeds the interest rate, it makes sense. It's the same logic as any leveraged investment, but with a unique collateral structure. Luna: How does this differ from just taking a securities-based loan? Because we've talked about those before. Lucas: Good question. With securities-based lending, you're borrowing against a portfolio of stocks or bonds. Sell-side financing is specifically tied to the sale of a private asset, like a business or real estate. The underwriting is completely different — it's about the sale process, not the liquidity of the collateral. Luna: So it's for private asset owners, not for people with liquid investments. Lucas: Exactly. And it fills a gap that most people don't even realize exists. You've got a business worth fifty million, but your net worth is tied up in it. You can't easily diversify without selling, but selling takes time. Sell-side financing gives you the best of both worlds. Luna: It's like having your cake and eating it too, if the sale actually closes. Lucas: Right. And honestly, if today's conversation has made you think differently about how you'd manage a big liquidity event, that's exactly why we do this. If it was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It keeps this show ad-free, and we appreciate the support. Luna: Yeah, no pressure. But if you enjoy these deep dives, it's a nice way to say thanks. Lucas: So back to the practical side — what are the key numbers to keep in mind when considering sell-side financing? First, the loan to value is typically sixty to eighty percent of expected net proceeds. Second, the interest rate is usually three to five percent over SOFR, which in today's environment means a single-digit rate. Luna: And what about fees? There's often a commitment fee, right? Lucas: Yes, typically one to two percent of the loan amount, plus legal and diligence costs. So it's not cheap, but it's a fraction of the cost of selling assets at a discount or missing out on an opportunity. Luna: Are there any tax considerations? I imagine interest is deductible, but is it always? Lucas: Interest on sell-side financing is generally deductible if the proceeds are used for investment purposes, but it gets complicated if the loan is used for personal expenses. You need to trace the use of funds, and that's where a good tax advisor comes in. Luna: So it's not a one-size-fits-all tool. It requires a specific situation. Lucas: Absolutely. It works best for family offices that have a clear exit plan and a specific use for the liquidity. It's not something you do just for the sake of borrowing money. The sale has to be relatively certain, and the borrower needs to be comfortable with the risk. Luna: What are some red flags that should make someone walk away from a sell-side financing deal? Lucas: If the sale process is rocky — say, the buyer is having financing trouble or there are regulatory hurdles — lenders might still offer terms, but they'll be much more expensive. If the loan to value is too high, like above eighty percent, you're taking on a lot of risk. Luna: And if the sale is far from certain, it's probably not worth the risk. Lucas: Exactly. In that case, you're better off waiting or finding a different source of capital. But when it works, it's a beautifully efficient way to unlock value that's otherwise locked in a private business. Luna: It's one of those tools that shows how sophisticated family offices can be in managing their wealth. Lucas: And it's a good reminder that wealth management isn't just about picking stocks or funds. It's about using the full toolkit — from trusts to lending to exit planning — to create flexibility and opportunity. Sell-side financing is a prime example.