What is a seller note?
A seller note is a form of financing in which the seller of a business lends part of the purchase price to the buyer, who repays it over time rather than paying the full amount in cash at close. Instead of receiving all their proceeds upfront, the seller holds a promissory note and is paid back with interest, much like a lender.
Seller notes are common in smaller and mid-market acquisitions where the buyer cannot or does not want to fund the entire price with cash and senior debt. The note fills a gap in the capital structure — bridging the difference between what the buyer can raise from lenders and equity and what the seller wants to receive.
Beyond financing, a seller note serves a signaling function. A seller willing to leave money in the deal is, in effect, vouching for the business — they retain a financial stake in the buyer's ability to keep it healthy enough to repay them.
How a seller note actually works
The note sits within the deal's capital structure with its own terms and repayment profile.
- Size the note. The buyer and seller agree what portion of the price will be deferred — typically a minority of the total, filling the gap left by senior debt and equity.
- Set the terms. The note specifies an interest rate, a repayment schedule, a maturity date, and its ranking relative to the senior lenders.
- Subordinate to senior debt. Seller notes are usually subordinated, meaning senior lenders are repaid first and the seller stands behind them in priority.
- Repay over time. The buyer services the note from the business's cash flow, often after senior debt obligations, until it is paid off at maturity.
Because it is subordinated and depends on the business performing, a seller note carries more risk than senior debt — which is reflected in its interest rate and in any protective terms the seller negotiates.
Why sellers and buyers use them
For the buyer, a seller note reduces the cash and senior debt needed at close, lowering the upfront equity check and making a deal feasible that might otherwise not pencil. It can also bridge a valuation gap, letting the parties agree on price while deferring part of the payment.
For the seller, the note can secure a higher headline price, earn interest on the deferred amount, and spread the tax recognition of proceeds over time. The trade-off is risk: the seller becomes a subordinated creditor whose repayment depends on the buyer running the business well. A seller note can also be paired with an earnout when the parties want part of the price tied to future performance.