Use the Note for a Defined Purpose
A seller note may demonstrate confidence in the business, reduce cash due at closing, satisfy financing structure, or keep the seller exposed to specific transition risk. The parties should understand which objective the note serves.
Seller financing should not make an unsupported purchase price appear affordable. The business must still support total debt service under a conservative case.
Negotiate the Complete Economics
Document principal, interest, amortization, maturity, payment frequency, prepayment, late charges, default interest, and any balloon payment. Model the schedule alongside senior debt, taxes, capital expenditure, and working capital.
A payment-free period may help transition cash flow but increases the later burden. Buyers should model the full schedule rather than focusing only on the first year.
Address Security and Priority
The parties and lenders must determine whether the note is secured, what collateral applies, whether personal guarantees exist, and how the seller's rights rank behind senior financing.
Subordination and standstill terms can limit the seller's remedies after default. These documents require coordinated legal and lender review before closing.
Connect the Note to Claims and Transition
The purchase agreement may allow offsets against note payments for defined indemnification claims, subject to notice and dispute procedures. Vague self-help rights create conflict.
If seller cooperation is important, document transition duties separately. Debt repayment and consulting performance should not depend on assumptions left outside the agreements.
Buyer Checklist
- Define the purpose of seller financing
- Model the full payment schedule
- Confirm senior-lender requirements
- Document collateral and guarantees
- Negotiate subordination and remedies
- Coordinate indemnity offsets
- Write transition duties separately
Frequently Asked Questions
What is seller financing?
It is a transaction structure in which the seller receives a promissory note for part of the purchase price and is paid over time.
Does a seller note prove the business is strong?
It can signal confidence, but it does not replace financial, legal, operational, and commercial diligence.
Can a seller note be subordinate to a bank loan?
Yes, senior lenders often require subordination or standstill terms. The exact requirements should be resolved before closing.
This guide is educational and does not replace transaction-specific legal, tax, accounting, lending, insurance, or valuation advice from qualified professionals.