Seller financing in business acquisitions
Seller financing is an arrangement where the seller of a business accepts part of the purchase price over time, as a promissory note from the buyer, instead of receiving all of it at closing.
Key takeaways
- The buyer repays the seller note with interest over an agreed term, often after the senior lender is paid.
- It reduces the cash a buyer needs at closing and signals the seller's confidence in the business.
- Seller notes are often combined with bank or SBA debt, and lenders have their own rules on how the note is treated.
- Key terms to negotiate: interest rate, term, security, subordination and what happens on default.
Why sellers and buyers use it
For the buyer it lowers the equity needed at closing. For the seller it can support a higher headline price and keeps them motivated to help the transition. Sellers carry the risk that the business underperforms, so they usually ask for security and clear default terms.
How it fits with other financing
Deals commonly layer a senior loan, a seller note and the buyer's equity. The senior lender normally ranks first, so the seller note is often subordinated. If an SBA loan is involved, the lender decides how the seller note counts toward the buyer's required equity, so ask early.
Terms to negotiate
Agree the interest rate, the repayment schedule, whether payments can be paused, any personal guarantee, what collateral secures the note and the remedies on default. Have an attorney draft the note and any subordination agreement.
Frequently asked questions
It varies widely with the deal, the lender and the industry. There is no standard percentage, so negotiate it against the whole financing stack.
Last reviewed . General information, not legal, tax or financial advice.