The Ins and Outs of Seller Notes in M&A Deals

A founder came to us last year with a $3.8 million offer for his SaaS business. Good product. Clean books. Reasonable multiple. One problem: the buyer could only put $2.4 million on the table at closing. The rest, roughly 37% of the purchase price, would need to come as a seller note. The founder’s first instinct was to walk away. He wanted all cash. No loose ends. I told him to sit down and hear me out, because walking away from that deal would have been a $3.8 million mistake.

Seller notes show up in the majority of lower middle market M&A transactions. According to Axial’s analysis of 100 LOIs, the median seller note in the technology sector runs around 21% of the purchase price. In some deal structures, it climbs higher. If you are selling a business in 2025 or 2026, you need to understand how these work, what the risks actually are, and when saying yes to a seller note is the smartest move you can make.

What a Seller Note Actually Is

It is simpler than most people think, and more consequential than most people realize.

A seller note is a loan from you, the seller, to the buyer. Instead of receiving the full purchase price at closing, you agree to defer a portion. The buyer signs a promissory note committing to repay that amount over time, typically with interest. Think of it as you becoming the bank for part of the deal.

The terms vary, but most seller notes in the lower middle market share a common structure: a fixed interest rate between 4% and 8%, repayment over 3 to 7 years, and some form of security or subordination agreement. The note usually sits behind the senior lender. That means if the buyer also has an SBA loan or bank debt, the bank gets paid first. You get paid second.

That detail matters more than most sellers appreciate. It is the source of most of the risk, and most of the negotiation leverage, in any deal that includes a seller note.

Why Buyers Ask for Them

Buyers ask for seller notes because cash is finite and deal structures are creative. Here are the real reasons, not the polished ones:

They cannot get full financing from a lender. Most SBA 7(a) loans cap at a certain loan-to-value ratio. If the deal price exceeds what the bank will lend, the gap has to come from somewhere. A seller note fills that gap. Without it, the deal dies or the buyer needs a partner, which takes months and changes the dynamics entirely.

They want skin in the game from you. A seller note signals that you believe in the business you are selling. If you refuse to carry any paper, some buyers read that as a red flag. “If the seller won’t bet on the next 3 years, why should I?” It is not always rational, but it is real.

They are preserving working capital. A buyer who drains every dollar to close the deal starts day one with no cushion. Seller notes let the buyer keep cash in the business for growth, payroll, and the inevitable surprises that come with any acquisition. A well-capitalized buyer is more likely to succeed, which means you are more likely to get paid.

The Risks You Need to Understand

This is where I stop sugarcoating it.

A seller note means you are lending money to someone who just bought your company. Read that sentence again. You are extending credit to a person or firm that may or may not run the business as well as you did. The risks are real.

Default risk. If the buyer mismanages the business, revenues drop, and they cannot service the debt, you are an unsecured or subordinated creditor. Collecting on a defaulted seller note is expensive, slow, and emotionally brutal. You built that company. Watching someone run it into the ground while owing you money is not a position anyone wants to be in.

Subordination. If the deal includes bank debt, your note almost certainly sits behind it. In a worst-case scenario where the business fails, the bank gets paid first from any remaining assets. You may get pennies on the dollar. Or nothing.

Opportunity cost. Money locked in a seller note is money you cannot invest elsewhere. If you are counting on those funds for your next venture, retirement, or simply peace of mind, a 5-year repayment schedule changes your financial planning significantly.

SBA standby requirements. If the buyer is using an SBA loan, the lender may require your seller note to be on “full standby” for the life of the loan. That means no principal or interest payments to you until the SBA loan is fully repaid. As of 2025, a standby seller note can count as equity injection, but it cannot exceed 50% of the required equity or 5% of total project costs. This is a meaningful restriction that many sellers do not learn about until deep into the deal.

When a Seller Note Makes Sense

Despite the risks, there are situations where carrying a seller note is the right call. Here is how I think about it with our clients at Livmo.

The deal price justifies it. Our founder with the $3.8 million offer? He had two other bids. One was $2.9 million all cash. The other was $3.2 million with an earn-out. When you compare a $3.8 million deal with a 20% seller note to a $2.9 million all-cash offer, you net more even if you discount the note for risk. Run the math before you run from the structure.

The buyer is credible. A PE-backed buyer with a portfolio of successful acquisitions is different from a first-time buyer with a thin resume. Assess the buyer’s operational track record, their capitalization, and their plan for the business. A strong buyer makes a seller note far less risky.

The terms protect you. Smart sellers negotiate protections into the note: personal guarantees from the buyer, acceleration clauses if the business is resold, security interests in business assets, financial covenants requiring minimum revenue or EBITDA thresholds. These terms do not eliminate risk, but they give you recourse.

The tax benefit matters to you. Receiving the purchase price over multiple years through an installment sale can defer capital gains taxes. Depending on your tax bracket and the size of the deal, this can be worth hundreds of thousands of dollars. Talk to your CPA before dismissing seller financing on principle.

How Different Buyers Use Seller Notes

Not all buyers approach seller notes the same way. Understanding the buyer’s profile helps you anticipate what they will ask for and why.

Family offices tend to negotiate the highest seller notes. They take a long-term view, prefer to keep cash deployed across their portfolio, and often want the seller involved post-close. A higher note creates ongoing alignment.

Independent sponsors and search funds use seller notes to bridge funding gaps. These buyers typically raise capital deal by deal. A seller note reduces the equity they need from investors, which makes the deal economics work for everyone.

Private equity firms rely less on seller notes because they have access to institutional financing and leverage. When PE does ask for a note, it is usually smaller, around 5-10%, and positioned as a goodwill gesture rather than a structural necessity.

Strategic acquirers and corporations are the most likely to pay all cash. They have balance sheets. When they offer a seller note, it is often tied to an earn-out or performance holdback rather than a financing need.

Negotiating a Seller Note That Protects You

The terms matter more than the percentage.

If you are going to carry a seller note, negotiate it like a lender, not like a seller eager to close. Here is what to push for:

• Interest rate above market: You are taking subordinated risk. Your rate should reflect that. Aim for 6-8%, not the 3-4% some buyers propose.
• Personal guarantee: If the buyer is an individual or small fund, insist on a personal guarantee. This means they are on the hook even if the business fails.
• Acceleration on resale: If the buyer flips the business within 2-3 years, your note should accelerate to full repayment. You should not finance someone else’s arbitrage.
• Financial covenants: Require quarterly or annual financial reporting. Set minimum thresholds for revenue or EBITDA. If the business deteriorates below those thresholds, you have early warning and potential remedies.
• Security interest: Get a lien on business assets. Even if subordinated to the senior lender, a security interest gives you standing in a default scenario.

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