Glossary
Seller Note (Seller Financing)
A seller note is a loan from the seller of a business or property to the buyer, covering part of the purchase price that the buyer repays over time. It reduces the cash and senior debt needed at closing, signals the seller's confidence in the business and is typically subordinated to the senior lender.
Example
A business sells for $3,000,000. The buyer contributes $300,000 of equity, a bank provides a $2,400,000 senior loan, and the seller finances the remaining $300,000 with a note at 7% amortizing over 5 years, for payments of about $5,940 per month, or $71,284 per year. Underwriters add this payment to senior debt service when calculating whether cash flow covers all obligations.
How it is used in underwriting
Seller notes are common in small and lower middle market acquisitions, especially SBA-financed deals. They bridge valuation gaps, reduce the buyer's equity requirement and keep the seller financially interested in a smooth transition. Lenders generally view a meaningful seller note as a positive signal, since a seller who believes the business will falter would rather take all cash. Underwriters review the note's amount, rate, term, amortization and subordination terms, and include its payments in DSCR unless it is on standby, meaning payments are deferred for a defined period under the senior lender's requirements.
Seller notes are almost always subordinated to the senior lender, with an intercreditor or subordination agreement that limits payments if the senior loan is in default. In SBA lending, a seller note may count toward the buyer's equity injection only under specific conditions, which the lender confirms against current SBA rules. Buyers sometimes negotiate rights to offset indemnification claims against the note, which makes it work like an escrow. Sellers should evaluate the buyer's ability to pay, because a seller note is unsecured or junior secured credit exposure to the business they just sold.
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Frequently asked questions
Why would a seller agree to a seller note?
A seller note can help close a deal at a higher price, widen the pool of buyers who can finance the purchase, and earn interest income. It may also offer tax advantages through installment sale treatment. Many buyers and lenders expect some seller financing in small business acquisitions as a sign of confidence.
Is a seller note subordinate to the bank loan?
Usually yes. Senior lenders typically require the seller note to be subordinated, meaning it is paid only after the senior loan in a default, and may restrict payments if covenants are breached. Some lenders, including in SBA deals, require part or all of the note to be on standby for a period.
Does a seller note count as equity?
Generally a seller note is debt, not equity. However, in some SBA 7(a) acquisitions, a seller note on full standby for a specified period can count toward the buyer's required equity injection, subject to current SBA rules. Conventional lenders evaluate it case by case.
Related terms
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