A seller note is a promissory note issued by a business seller to a buyer as partial financing for the purchase. Rather than requiring full payment at closing, the seller agrees to lend a portion of the purchase price to the buyer, typically secured by the business assets or personal guarantees. This arrangement benefits both parties: buyers gain access to capital without bank debt, while sellers increase deal likelihood and may receive favorable terms or higher valuations.
How It Works
In a typical seller note arrangement, the buyer pays a down payment in cash (often 20-40% of the purchase price) while the seller finances the remaining balance. The note specifies the interest rate, repayment term (commonly 3-7 years), payment schedule, and default provisions. The seller essentially becomes a junior lender, subordinate to bank financing but senior to equity holders. Payments typically begin immediately or after a grace period, and the note may include prepayment penalties or acceleration clauses if the buyer defaults.
Why It Matters for Investors
For angel investors and business owners, seller notes are critical deal structures. As a seller, a note lets you finance the gap between what buyers can pay and your asking price without losing the sale. As an investor acquiring a business, seller notes reduce your cash requirements and demonstrate the seller's confidence in the company's future. Understanding seller note terms—interest rates, subordination status, and covenants—directly impacts your investment returns and risk profile. Well-structured notes can improve deal economics for everyone involved.
Example
A software company valued at $2 million receives an offer from a buyer with $600,000 cash. Rather than decline, the seller accepts $600,000 upfront and agrees to a seller note for $1.4 million at 6% interest over 5 years. The buyer makes monthly payments of approximately $25,600 from company cash flow. The seller retains a security interest in the software IP and customer contracts. If the buyer defaults, the seller has recourse to seize assets or demand immediate payment through acceleration clauses.
Key Takeaways
- Seller notes bridge valuation gaps and enable deals that wouldn't otherwise close with all-cash structures
- Interest rates and terms should reflect market conditions and buyer creditworthiness—typically 5-8% for established companies
- Seller notes are subordinated to bank loans, making them riskier but potentially higher-yielding investments
- Clear documentation protecting the seller's position (security interests, personal guarantees, covenants) is essential for managing risk