When Seller Financing Appears
Seller financing is most common in three situations:
- SBA 7(a) deals: SBA lenders frequently require a seller note equal to 10%–15% of the purchase price to be on standby (no payments for 24 months) as additional equity in the deal. This is not optional — it's an SBA program requirement.
- Smaller transactions ($3M–$10M EV): Where senior lenders don't fully cover the purchase price and the buyer can't contribute more equity, the seller fills the gap.
- Higher-risk assets: Single-owner businesses with key person risk; customer concentration; unpredictable cash flows. Sellers in these situations may face a seller note demand even from well-capitalized buyers.
Typical Terms
Lower middle market seller notes typically look like this:
- Amount: 5%–20% of purchase price
- Interest rate: 5%–8% annually (varies with market rates)
- Term: 3–7 years
- Structure: Interest-only for a period, then principal amortization; or balloon payment at maturity
- Security: Often subordinated to senior lenders — the seller is last to be paid if the business struggles
Seller Risks
A seller note is not guaranteed cash — it's a loan to the new owner of your former business. If the business performs poorly under new management, the note may not be repaid. Key risks:
- Subordination: In an SBA or bank-financed deal, the seller note is typically on standby for 24 months and subordinated throughout — bank gets paid first in any default
- No security in the business assets: Unlike a bank, sellers rarely have a first lien on the business; default recovery is difficult
- Management dependency: Your note repayment depends on how well the new owner runs the business
Seller Notes vs. Earnouts
Both are forms of deferred consideration, but they're structurally different. A seller note is a fixed obligation — the buyer owes the money regardless of how the business performs. An earnout is contingent — it's only paid if performance targets are met. Seller notes are more seller-friendly in that respect; earnouts shift performance risk to the seller.
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