Vendor Take-back

A vendor take-back (VTB) — also called seller financing or a seller note — is an arrangement where the seller of a business accepts a portion of the purchase price as a promissory note rather than cash at closing. Instead of receiving 100% of the purchase price in cash at close, the seller "takes back" a debt obligation from the buyer, effectively financing part of the deal themselves. The buyer makes periodic payments (typically monthly or quarterly) over the note term, usually with interest, until the balance is repaid.

VTBs are extremely common in SMB M&A for several reasons. First, they bridge valuation gaps: when a buyer and seller disagree on price, a seller note can allow the buyer to pay more than they'd otherwise be comfortable with — because part of the risk is borne by the seller. Second, they signal seller confidence: a seller willing to take back a meaningful note is effectively betting that the business will perform well enough under new ownership to support repayments. Third, they fill financing gaps: SBA and conventional lenders cap total leverage, and a seller note can fill the gap between lender capacity and total deal value without requiring additional equity.

SBA loan rules significantly affect VTB structure. SBA 7(a) loans (the primary acquisition financing tool for SMB deals) permit seller notes but impose important conditions: the seller note must typically be "on standby" for a minimum period (often 24 months for notes required to complete the financing), meaning no principal or interest payments can be made during the standby period. SBA-compliant seller notes must be subordinate to the SBA-guaranteed loan in priority, must have specific subordination agreement language acceptable to the lender, and may not include balloon payments during the SBA loan's repayment period.

The seller note's terms — interest rate, repayment schedule, collateral, and subordination — are negotiated as part of the overall deal structure. Interest rates on seller notes range from 4-8% for market-rate financing; below-market rates may have imputed interest implications under IRS rules. Repayment schedules typically range from 3-7 years for SMB deals, with the buyer making regular principal and interest payments after any standby period. Collateral for seller notes may include a second lien on business assets (behind the senior lender's first lien) or personal guarantees from the buyer.

For buyers, a VTB is attractive because it reduces the equity required at closing, often comes with below-market interest rates compared to subordinate institutional debt, and is typically more flexible in its terms than institutional financing. For sellers, the downside is real: accepting a seller note means your proceeds are contingent on the buyer successfully operating the business — which creates ongoing credit risk against a business you no longer control.