The Seller Note: Financing Your Own Buyer, and What It Really Costs
A founder walked me through his closing statement, and he was pleased with the headline. Twelve million dollars for a company he had built over eighteen years. When I read down the page, two million of that twelve was a seller note, a loan he was making back to the buyer, payable over four years at six percent. He had already counted it. In his mind he had twelve million, and the note was just a formality, a scheduling detail about when the last slice arrived. Two years later the buyer hit a soft patch, the senior lender invoked a clause almost no one reads, and the note payments stopped. The money was not late. It was frozen, sitting behind a bank that had first claim on everything, and there was nothing my founder could do but wait and hope the business recovered.
A seller note, sometimes called seller financing or a vendor note, is the part of the purchase price that you agree to be paid over time instead of at close. Rather than the buyer handing you the full amount in cash on the closing date, you accept a promissory note for a portion of it. The buyer pays you back in installments, usually with interest, over a term that in lower middle market deals often runs three to five years. In substance, you have sold your company and then lent part of the proceeds back to the person who bought it. You are now both the former owner and a creditor of the new one.
Buyers ask for seller notes for reasons that are mostly rational and not sinister. A note reduces the amount of cash the buyer has to raise from a bank or an equity source, which makes the deal easier to finance and sometimes possible at all. It also serves as a confidence signal. A seller who is willing to leave two million dollars in the business, riding on the buyer's ability to run it well, is telling every lender in the room that the seller believes the company will keep performing after the keys change hands. And a note can bridge a gap in price. When a buyer will not quite reach your number in cash, a seller note is often how the last turn of value gets papered without either side blinking.
Here is the part founders miss, and it is the same part my twelve million dollar founder missed. A seller note is almost always subordinated. That means it sits behind the senior lender in line. If the business runs into trouble, the bank that provided the acquisition financing gets paid first, in full, before you see another dollar of your note. Worse, most senior loan agreements contain what are called blockage or standstill provisions. These let the senior lender legally freeze payments on your note the moment the buyer trips a covenant, even if the buyer is perfectly willing and able to pay you. You are not just last in line. You can be told to leave the line entirely and stand against the wall until the bank is comfortable again.
None of this makes a seller note a bad thing to accept. Done with open eyes, it can be genuinely good for you. The interest is real income, and on a well structured note it can pay you a return you would not get parking the same cash in a savings account. A note can be the specific lever that moves a hesitant buyer to your number rather than a lower one. And if you know the buyer, believe in the business you built, and have real conviction that it will keep performing, lending against that conviction is a reasonable bet on something you understand better than almost anyone. The danger is not the note. The danger is counting it as cash when it is not cash.
Because a seller note is not cash. It is risk capital, unsecured or thinly secured, concentrated entirely in the future performance of a single company you no longer control. Every dollar in that note is a dollar of your net worth still exposed to the business, the buyer's decisions, the buyer's lender, and the economy, for years after you thought you had exited. If the buyer overpays their team, takes on too much of their own debt, loses your biggest customer, or simply runs the place worse than you did, your note is where that damage lands. You carry the downside of ownership without any of the control that used to let you manage it.
The interest rate deserves a hard look, because buyers frequently propose a rate below what the risk actually warrants. Six percent on a subordinated, blockable note to a leveraged buyer is not the same risk as six percent from a bank. You are being asked to take equity-like risk for debt-like pay. That does not mean you should refuse the rate. It means you should price it honestly in your own head, compare it to what that same money could safely earn elsewhere, and treat any shortfall as a real cost of getting the deal done rather than a rounding error.
The terms of the note are where you protect yourself, and like most of what decides a founder's real outcome, they are movable before you sign and frozen after. Negotiate the interest rate up toward the risk you are taking. Push for a shorter term and faster amortization so more of the money arrives sooner, while the business is still the one you knew. Ask for security, a lien on assets or a personal guarantee from the buyer, so the note is not a bare promise. Read the subordination and standstill language line by line and cap how long the senior lender can block your payments. Insist on clear default and acceleration rights so that if the buyer stops paying, you can act rather than wait. And get the right to see financial statements, because a creditor who cannot see the borrower's numbers is a creditor flying blind.
The other move is to size the note against everything else in the deal that is not cash at close. A seller note rarely travels alone. It usually rides alongside an escrow holdback, sometimes an earnout, sometimes rollover equity. Each of those is another slice of your price that depends on the future rather than the closing date. I wrote about one of them in the escrow holdback, the part of your price you do not get at close, and another in rollover equity, the second deal most founders never negotiate. Add the seller note to those and you often find that the real cash a founder walks away with at close is meaningfully less than the headline, and the gap is all money riding on things that have not happened yet.
There is also a tax dimension worth naming, though you should work it through with your own accountant rather than take a rule of thumb from an article. Because the note pays out over several years, the gain attributable to it is often reported under the installment method, spread across the years you receive payments rather than recognized all at once. That can be an advantage or a complication depending on your situation, your basis, and the mix of the rest of the deal. The point is not the answer. The point is that a seller note changes the timing of your taxes as well as the timing of your money, and both belong in the analysis before you agree to the structure.
What I told the founder with the frozen note, after the fact, is what I try to tell founders before they sign one. A seller note can be a fine thing to hold. It can earn you a return, get you to a number a cash buyer could not reach, and let you keep a stake in a company you still believe in. But it is not the twelve million on the top line. It is a loan you are making to the person who bought your life's work, standing behind their bank, payable only if things go the way everyone hopes. Price it as the risk it is, negotiate the protections while you still can, and know your true cash at close before you celebrate the headline.
His business did recover, eventually, and the note was paid in the fourth year, later than promised and after a year of sleepless quarters he had not budgeted for emotionally or financially. He got his money. Many founders in his position do not. The difference between the two outcomes is rarely luck. It is whether the seller treated the note as cash or as the risk capital it always was, and whether anyone helped them read the subordination paragraph before they signed. That is the kind of thing we make sure founders understand before they agree to finance their own buyer at Cordis Group.