Promissory Note in Business Acquisitions: What It Is and What to Include
A promissory note is the legal document that records a debt obligation. In a business acquisition, it's the instrument the buyer signs to formalize seller financing — a written promise to pay the seller a specified amount, on a specified schedule, at a specified interest rate. Without a properly drafted promissory note, there's no enforceable debt instrument, and the seller has no legal basis for collection.
What a Promissory Note Must Include
- Principal amount — the total amount borrowed
- Interest rate — fixed or variable, expressed as an annual percentage rate
- Payment schedule — monthly, quarterly, or other; whether amortizing or interest-only with balloon
- Maturity date — when the final payment is due
- Maker and payee — the borrower (buyer or acquisition entity) and the lender (seller)
- Default provisions — what constitutes default and the cure period before the seller can exercise remedies
- Acceleration clause — right to declare the full balance due immediately upon default
- Governing law — which state's law governs disputes
- Personal guarantee — if the buyer is purchasing through an entity, the seller typically requires the buyer to personally guarantee the note
Secured vs. Unsecured Notes
A promissory note can be unsecured (based solely on the buyer's promise to pay) or secured by a lien on business assets. Sellers should almost always insist on a secured note backed by a UCC financing statement filed with the state — this gives the seller a perfected security interest in business assets, allowing them to seize assets in the event of default. An unsecured note requires a lawsuit and judgment before any collection can proceed.
If there's also an SBA loan, the bank's lien is senior — the seller's security interest is subordinate. But a subordinate lien is still meaningfully better than no lien.
Standby Provisions
When SBA financing is involved, the SBA requires the seller note to be on full standby for 24 months — no principal or interest payments from the business to the seller during that period. This standby requirement is memorialized in the promissory note itself and in a separate standby agreement signed at closing.
Promissory Note vs. Seller Note
These terms are used interchangeably. "Seller note" typically refers to the concept of seller-financed debt in a deal; "promissory note" refers to the specific legal document recording that debt. The seller note is evidenced by a promissory note. Both terms appear in deal negotiations — they mean the same thing in context.
Related Terms
- Seller financing — the arrangement that the promissory note documents
- Seller note — the conceptual term for seller-financed debt
- UCC filing — how the seller perfects a security interest to back the note
- SBA 7(a) loan — the senior lender whose standby requirements affect the note terms