Seller Note: Terms, Structure, SBA Rules, and What to Negotiate
A seller note is the debt obligation created when a seller agrees to accept installment payments rather than a full cash payment at closing. The seller effectively becomes a lender: the buyer signs a promissory note committing to repay the seller over time, with interest. The arrangement is also called seller financing or seller carry.
Seller notes appear in the large majority of small business acquisitions under $5M — they're the most common alternative or complement to bank financing.
Standard Seller Note Terms
- Principal: Typically 10%–30% of the purchase price; motivated sellers sometimes carry 50%+
- Interest rate: 5%–8% per year; negotiated between buyer and seller (no institutional rate floors)
- Term: 3–7 years, depending on deal size and seller preference
- Payments: Monthly principal + interest, fully amortizing — or interest-only with a balloon payment at maturity
- Security: Second lien on business assets (after SBA/bank first lien); personal guarantee from buyer
- Standby: If SBA-financed, full standby for 24 months (no payments during that period)
What Sellers Should Insist On
Security interest: File a UCC-1 financing statement perfecting a lien on all business assets. Without this, the seller is an unsecured creditor and must sue to collect in default.
Personal guarantee: If the buyer is purchasing through an LLC or corporation, require a personal guarantee from the individual buyer. An entity guarantee alone is only as good as the business's assets.
Cross-default provision: If the buyer defaults on the SBA loan, the seller note should also be declared in default — this prevents the buyer from current on the bank while ignoring the seller.
Life insurance: For large seller notes, some sellers require the buyer to carry a term life policy naming the seller as beneficiary, ensuring the note is paid if the buyer dies before full repayment.
What Buyers Should Negotiate
Full standby: If using SBA financing, negotiate the seller note on standby from the start — this reduces year-1 debt service significantly and improves DSCR.
Prepayment without penalty: Ensure the note allows prepayment without a penalty — many seller notes can be paid off early if the business performs well.
Offset right: Negotiate a right to offset indemnification claims against the seller note balance — if the seller breaches a warranty, the buyer can reduce the note rather than paying out and then suing.
Seller Note vs. Earnout
Both are deferred payments — but they're fundamentally different. A seller note is a fixed obligation: the buyer owes the amount regardless of business performance. An earnout is contingent: it's only paid if the business hits defined targets. A seller note is better for the seller (guaranteed payment); an earnout is better for the buyer (performance-dependent). Most deals use seller notes, not earnouts, for deferred consideration.
Related Terms
- Seller financing — the arrangement that a seller note implements
- Promissory note — the legal document evidencing the seller note
- UCC filing — how the seller secures the note against business assets
- DSCR — seller note payments factor into the buyer's debt service coverage calculation