Seller Note
A promissory note issued by the buyer to the seller for deferred payment of part of the purchase price — the specific instrument through which seller financing is delivered.
Full Definition
While "seller financing" describes the economic arrangement, "seller note" describes the actual legal instrument. The buyer issues a promissory note to the seller promising to pay specified amounts over time at specified interest rates. The note documents the debt obligation, payment terms, security (if any), default provisions, and remedies.
How it actually works: Key terms of a typical seller note: (1) Principal amount — face value of the note; (2) Interest rate — fixed typically, sometimes floating; (3) Payment schedule — amortization (fully amortizing, balloon, interest-only); (4) Maturity date; (5) Security/collateral — unsecured or secured by specific assets; (6) Subordination — position relative to other debt; (7) Prepayment provisions — penalties or ability to prepay; (8) Default definition — what constitutes default; (9) Default remedies — what seller can do upon default (acceleration, foreclosure if secured, etc.); (10) Assignment restrictions; (11) Governing law and jurisdiction.
Structures: (1) Fully amortizing — equal principal + interest payments throughout term; (2) Balloon — periodic interest payments with principal balloon at maturity; (3) Interest-only with principal amortization later — common in SBA deals; (4) Standby — no payment for specified initial period (2 years typical in SBA).
Common sizes by deal type: SBA transactions 10-25% of purchase price; sponsor-backed LMM 5-15%; larger PE deals 0-10% or no seller note at all.
Seller vs. Buyer Perspective
Your seller note is essentially a private-credit loan — you're taking credit risk on the buyer's business. Minimize risk through: (1) shortest term acceptable (5 years preferred to 10); (2) highest reasonable interest rate (market rate, not below); (3) security interests in specific assets where possible; (4) personal guarantees from buyer principals; (5) narrow default triggers; (6) specific affirmative covenants (maintain insurance, pay taxes, maintain senior debt compliance); (7) acceleration rights on default. Model the risk-adjusted return — effective yield after default risk is often 2-4% below coupon rate. If you need current cash flow more than deal completion, push to reduce seller note size even at lower purchase price.
Seller notes provide flexible, subordinated capital often unavailable elsewhere. Negotiate: (1) long term with back-weighted amortization (more runway); (2) low interest rate (6% reasonable in SBA; market in sponsor deals); (3) standby period or interest-only in early years; (4) limited security (preserve senior lender flexibility); (5) narrow default triggers; (6) reasonable affirmative covenants; (7) ability to pay in kind (PIK) if temporary cash flow issues. Pay the seller reliably — they often become references and sometimes introduce other deals.
Real-World Example
A $3.5M EBITDA services business sold at $17M. Capital structure: $2.4M buyer equity, $10.2M senior debt (SOFR + 5%, 5-year term), $2M mezzanine (12% cash + 1% PIK, 7-year term), $2.4M seller note. Seller note terms: 6 years, 6% interest, year 1 interest-only, years 2-6 fully amortizing, subordinated to senior and mezz, secured by specific equipment valued at $1.8M, personal guarantee from buyer principal (who has $1.5M net worth). Seller note payments: Year 1 interest only = $144K. Years 2-6 amortizing = roughly $530K/year (principal + interest). Total payments to seller over 6 years: $2.4M principal + $444K interest. Three years in, business performing well, DSCR healthy, senior debt paying down. Seller note on schedule. Effective yield to seller: ~6% on a subordinated note — modest but reliable. Had the buyer defaulted, the personal guarantee and equipment security would have provided meaningful recovery. The buyer's reliable payment history makes them a preferred buyer in the local market.
Why It Matters & Common Pitfalls
- !Subordination is fundamental. Senior debt gets paid first; seller notes stand in line.
- !Unsecured vs. secured. Unsecured seller notes carry more risk. Equipment or AR security helps materially.
- !Personal guarantees. For smaller deals, requiring personal guarantees from buyer principals with real net worth significantly reduces default loss.
- !Default triggers. Avoid overly narrow triggers (only non-payment) — include covenant breaches, senior debt defaults, material business changes.
- !Acceleration and enforcement. Acceleration rights allow immediate collection on all remaining balance. Specific performance and foreclosure rights matter.
- !Refinancing risk. If the buyer refinances senior debt, the new senior lender may require seller note subordination on unfavorable terms.
- !Assignment. Restrict assignability — you don't want your note sold to a distressed-debt firm.
- !Prepayment. Buyers sometimes want ability to prepay without penalty. Negotiate based on your need for guaranteed future interest.
Frequently Asked Questions
What is a seller note?↓
What's the typical seller note size?↓
How does a seller note work in SBA 7(a) transactions?↓
Related Terms
Seller Financing
A financing structure where the seller accepts deferred payment — typically a seller note — for part of the purchase price, effectively financing the buyer's acquisition alongside institutional debt.
Installment Sale
A sale where the seller receives payments over multiple years and — if elected — recognizes the taxable gain ratably as payments are received rather than all in the year of sale. Available for seller notes and earnouts in most circumstances.
SBA 7(a) Loan
The primary Small Business Administration loan program for business acquisitions — government-backed financing of up to $5M with 10-year terms, enabling individual buyers to finance purchases they couldn't otherwise qualify for.
Senior Debt
The highest-priority debt in a capital structure — first to be repaid in default, typically secured by business assets, and carrying the lowest interest rate of any debt tranche due to its preferred position.
Personal Guarantee
A pledge by an individual (rather than an entity) to repay a debt if the business defaults — making the individual personally liable for the obligation. Personal guarantees extend lender recovery beyond business assets to the guarantor's personal assets. SBA loans require personal guarantees from owners with 20%+ ownership stakes. For sellers accepting seller notes, negotiating a personal guarantee from the buyer's principals is an important protection — without it, recovery is limited to business assets (which may be diminished if the business fails).
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Disclaimer: The information provided on this page is for educational and informational purposes only. It should not be considered financial, legal, or investment advice. Business valuations depend on many factors specific to each situation. Always consult with qualified professionals — including business brokers, CPAs, and M&A attorneys — before making acquisition or sale decisions. LegacyVector is not a licensed broker, financial advisor, or attorney. Data shown may be based on limited samples and may not reflect current market conditions.
LegacyVector Research Team
Reviewed by M&A professionals · Updated April 2026