Seller Note Explained: How It Works in Business Sales

What Is a Seller Note?

A seller note is when you, the business seller, agree to finance part of the purchase price instead of getting all your cash upfront. The buyer pays you over time-usually 3 to 7 years-with interest.

I've used seller notes in three of my five SaaS exits. They're not my favorite thing in the world, but they often make deals happen that wouldn't otherwise close. Most buyers can't write a check for your full asking price, and most sellers won't walk away from a deal just because the buyer needs financing.

Here's how it typically works: Let's say you sell your agency for $500K. The buyer has $300K in cash. You agree to a $200K seller note at 6% interest, paid monthly over 5 years. You get your $300K at closing, then collect payments on the remaining $200K like a bank would.

Seller notes go by other names-seller financing, owner financing, seller paper, or seller debt. They all mean the same thing: you're playing bank for your buyer.

How Common Are Seller Notes?

If you're selling a business and think you can avoid seller financing, think again. . All-cash deals are rare-.

This isn't because buyers are broke. It's because banks won't lend on service businesses without hard assets. SBA loans help, but they don't cover everything. Most buyers need multiple sources of capital to close a deal: some cash, some bank financing, and seller financing to bridge the gap.

In the middle market-deals above $10 million-seller notes still appear, but they're smaller. You'll see 5-10% of the deal financed by the seller rather than 30-40%. The bigger the deal, the more likely the buyer can cobble together institutional financing.

For businesses under $5 million, seller financing isn't optional. It's how deals get done.

Why Buyers Want Seller Notes

Buyers love seller notes because they reduce the cash needed at closing. Instead of scraping together the full purchase price or taking on expensive bank debt, they structure a deal where 30-40% is financed by you.

From a buyer's perspective, this is smart. They're using the business's own cash flow to pay you back. If your agency generates $100K in annual profit, they can service a $200K note while still taking home money themselves.

But there's another reason buyers push for seller notes: it keeps you invested in the outcome. If you take 100% cash at closing, you might disappear the next day. If you're carrying a note, you have skin in the game. You'll stick around for the transition, answer questions, and make sure the business doesn't crater in month two.

Buyers also see seller notes as a sign of confidence. If you're not willing to finance any of the sale, what does that say about the business? Are you running from something? A seller who won't offer financing raises red flags for buyers.

Why Sellers Agree to Them

You agree to a seller note because it's the difference between selling and not selling. That's the honest answer.

Very few buyers have the full cash amount sitting in a checking account. Banks won't lend against service businesses without hard assets. So if you want to exit, you either accept a lower all-cash offer or take a higher offer with seller financing.

In my experience, a deal with a 30% seller note at a higher valuation usually nets you more money than an all-cash deal at a lower number-assuming the buyer actually pays you back. That's the gamble.

The math works like this: An all-cash buyer might offer you 70% of your asking price because they know cash is valuable to you. A buyer willing to use seller financing might pay full price or even a premium because the terms give them flexibility. .

The other benefit: tax treatment. Spreading your sale proceeds over multiple years can reduce your tax hit in any single year. Talk to your CPA about installment sale treatment under IRS rules.

Typical Seller Note Terms

Every deal is different, but here are the standards I've seen across my exits and the deals I've advised on:

• Note size: 20-40% of the total purchase price. . Sometimes higher for smaller deals where the buyer is riskier.
• Interest rate: , though they can reach 10% for riskier deals. The rate reflects risk, not market conditions.
• Term length: . Occasionally longer for larger deals.
• Payment structure: Monthly payments with principal and interest, just like a mortgage. Sometimes interest-only for the first year, then principal + interest after that.
• Security: The note is usually secured by the business assets. If the buyer defaults, you can reclaim the business (in theory-more on that below).

On one of my exits, we structured a 5-year note at 6% with a 2-year balloon payment. The buyer made interest-only payments for 24 months, then refinanced with a bank to pay off the remaining principal. That worked well for both sides.

. Don't let a buyer tell you the rate should match residential mortgage rates. You're taking on far more risk than a mortgage lender because the collateral-a small business-is worth less if things go south.

Understanding Subordination

Here's something most sellers don't understand until they're in the middle of negotiations: .

What does that mean? If the buyer gets an SBA loan for part of the purchase, that bank debt gets paid first. Your seller note is second in line. .

This increases your risk. If the business tanks and there's not enough money to pay everyone, the bank gets theirs first. You might get nothing.

That's why seller notes carry higher interest rates than bank debt. You're taking more risk, so you charge more. The buyer might complain, but the math is fair.

If there's no bank financing in the deal, your seller note isn't subordinated to anything. You're first in line. That's a much better position.

Seller Notes and SBA Loans

If your buyer is using an SBA 7(a) loan, the rules around seller notes get specific. . .

The catch: . That means the buyer doesn't pay you a dime until the SBA loan is paid off-which could be 10 years.

That's a long time to wait. But it does widen the buyer pool. More buyers can qualify when they don't need as much cash upfront.

Some sellers structure a second note outside the SBA requirements. . The first 5% is on standby, the second 10% pays monthly.

Talk to an SBA-experienced attorney if your buyer is going this route. The rules are detailed and if you screw up the structure, the SBA can reject the loan.

The Real Risk: Will You Actually Get Paid?

This is the part most sellers don't think hard enough about. A seller note is only worth something if the buyer pays it.

I've been paid in full on two notes. I've had one go sideways where the buyer stopped paying after 18 months. We restructured the deal and I eventually got most of my money, but it was a nightmare. Legal fees, stress, months of back-and-forth. Not fun.

Here's what kills deals: the buyer runs the business into the ground, revenue drops, and suddenly they can't make payments. You're sitting there with a piece of paper saying they owe you $150K, but the business is generating zero profit. Good luck collecting.

That's why due diligence on the buyer is just as important as the buyer's due diligence on your business. Do they have operating experience? Have they run a similar business before? Do they have a plan, or are they winging it?

If the buyer is a first-time entrepreneur with no track record, I'd be very nervous about a large seller note. If they've successfully bought and grown two other agencies, I'd feel better.

Ask the buyer for references from previous acquisitions. If they've bought businesses before, talk to those sellers. Did they make payments on time? Were they professional? Did the businesses survive under their management?

I've worked with clients who've taken seller notes and lost everything because they didn't treat the due diligence like their financial life depended on it-because it does. One agency owner I consulted sold his business with a $400K note, and when the buyer started missing payments 8 months in, he realized he'd never actually verified their operational experience. The same principles I teach for vetting cold email prospects apply here: verify everything, assume nothing, and if someone can't provide documentation in 48 hours, that's your red flag. I once booked 18 meetings from 60 cold emails because I did my research upfront-that same research intensity should go into anyone you're trusting with a six-figure promissory note.

How to Protect Yourself

If you're going to carry a note, build in protections. Here's what I do:

Personal guarantee: Make the buyer personally liable for the note. If the business fails, they still owe you the money. This isn't standard in all deals, but push for it. A buyer who won't personally guarantee the note is telling you they're not confident in their ability to pay.

Security interest and UCC-1 filing: . Your lawyer will file this with the state to formalize your security interest in the business assets.

. If they try to sell equipment or transfer ownership without paying you first, you have legal recourse.

The UCC-1 is separate from the promissory note itself. The note is the agreement to pay. The UCC-1 is the public filing that secures your interest. Both are necessary.

Earnout alternative: Instead of a fixed note, structure part of the payment as an earnout tied to revenue or profit. If the business performs, you get paid. If it tanks, you don't, but you also weren't owed a fixed amount. This shifts risk but can result in a higher payout if things go well.

Shorter term: A 3-year note is less risky than a 7-year note. The longer the term, the more time for things to go wrong. If the buyer needs a longer runway, consider a 3-year note with a refinancing option.

Higher down payment: The more cash they pay upfront, the less you're risking. I'd rather see 70% cash and a 30% note than 50/50. -they have too much to lose.

Financial reporting rights: Include a clause requiring the buyer to provide you with monthly or quarterly financial statements. You want to see if the business is performing and if they'll be able to make future payments. If revenue is dropping, you can intervene before they default.

Stay on the lease: If the business operates from a leased location, . If the buyer defaults and you need to take the business back, you'll need access to the location.

Seller Notes vs. Earnouts

People confuse these, so let's clear it up.

A seller note is a fixed debt. The buyer owes you $200K no matter what. If the business does great, you get $200K. If the business fails, you're still owed $200K (though collecting might be hard).

An earnout is variable. You get paid based on future performance. If the business hits $X in revenue or $Y in profit, you get a bonus payment. If it doesn't, you get nothing.

The other key difference: because payments are contingent on performance.

Earnouts sound good in theory but can be a mess in practice. The buyer controls the business, and they have every incentive to minimize the metrics that trigger your earnout. I've seen buyers deliberately tank revenue in year one to avoid earnout payments, then ramp back up in year two.

I prefer seller notes because the terms are clear. You either pay me or you don't. There's no creative accounting to argue about.

Negotiating the Note Terms

Everything is negotiable. The buyer will push for a longer term, lower interest, and no personal guarantee. You want the opposite.

Here's my framework: Start with a 3-year term at 7% interest, secured by the business, with a personal guarantee. The buyer will counter with 5 years at 5%, no personal guarantee. You meet in the middle at 4 years, 6%, with a guarantee.

If the buyer refuses a personal guarantee, I'd want a higher down payment or a shorter term. The personal guarantee is your safety net. Without it, you're relying entirely on the business continuing to perform.

Also negotiate prepayment terms. Can the buyer pay off the note early without penalty? I'd allow it-getting paid faster is better than waiting. But some sellers charge a prepayment penalty to lock in their interest income.

Payment structure matters too. .

Consider offering interest-only payments for the first 6-12 months to give the buyer breathing room during the transition. Then switch to principal + interest. Or structure a balloon payment where they make smaller monthly payments and pay off the bulk at the end. Just make sure they have a plan to refinance when that balloon comes due.

Here's what I tell my clients about negotiation: the first number you throw out sets the frame for everything that follows. When I was scaling my agency to $600K in annual recurring revenue in 60 days, I started by charging $1,000, then doubled to $2,000, then $4,000, eventually settling at $12,000. The clients who pushed back hardest on the $12,000 price were the worst clients. Same thing with seller notes-if a buyer is nickel-and-diming you on interest rates or trying to push the term from 3 years to 7 years, they're telling you exactly how they'll behave when payments are due. I dig into this in detail right here:

Using a Third-Party Loan Servicer

Here's something most sellers don't know: .

This removes the awkwardness of chasing the buyer for payments every month. The servicer sends statements, processes payments, tracks principal and interest, and handles late notices if necessary.

It costs a small fee-usually a percentage of each payment-but it's worth it. The buyer sends payments to the servicer, not to you. You receive a monthly check or ACH transfer with a detailed statement.

This also creates a clean paper trail if you ever need to take legal action. The servicer's records are documentation that holds up in court.

When to Walk Away

Not every deal is worth doing. If the buyer can only put down 30% and wants a 7-year note with no personal guarantee, that's a bad deal. You're taking all the risk.

I walked away from one acquisition offer because the buyer wanted 50% seller financing over 10 years. That's not a sale-that's a prayer. I'd be 10 years older before I saw my full payout, and the odds of actually collecting over a decade are terrible.

If you're going to carry significant seller financing, the buyer needs to be rock-solid. Otherwise, take a lower all-cash offer and sleep better at night.

Here are the red flags that should make you walk: First-time buyer with no operating experience. Buyer who won't provide financials or references. Buyer asking for more than 50% seller financing. Buyer who won't give a personal guarantee. Buyer whose business plan is vague or unrealistic.

One red flag doesn't kill the deal. But if you see three or four, walk away. There will be other buyers.

What Happens If the Buyer Defaults

Let's say the buyer stops paying. Now what?

First, your lawyer sends a demand letter. If that doesn't work, you can accelerate the note-declare the full amount due immediately-and take legal action.

If the note is secured and you filed a UCC-1, you can foreclose on the business assets and take the company back. But here's the problem: by the time the buyer defaults, the business is usually in rough shape. You're repossessing a dying company, not the thriving operation you sold.

If the buyer gave a personal guarantee, you can go after their personal assets. But most small business buyers don't have significant personal wealth, or they've structured things to shield themselves.

The reality is that collecting on a defaulted seller note is expensive and time-consuming. You'll spend $20K-$50K in legal fees and months of your life. Prevention-vetting the buyer hard upfront-is way better than trying to collect later.

I've been through one default. We ended up restructuring the note with lower payments and a longer term. I got paid, but it took an extra two years and probably $15K in legal costs. Not worth it.

Additional Security Measures

Beyond the standard protections, here are some creative ways to reduce your risk:

Key person insurance: Require the buyer to maintain life and disability insurance on themselves or key managers, with you named as beneficiary up to the note amount. If the buyer dies or becomes disabled, the insurance pays off your note.

Escrow for transition payments: If you're staying on for a transition period and receiving consulting payments, have those payments deposited into an escrow account that also secures the note. If the buyer defaults, you can access those funds.

Equity conversion clause: Include a provision that if the buyer defaults, the remaining note balance converts to equity. You become a partial owner again. This gives you control to fix the business rather than just suing for money that doesn't exist.

Acceleration triggers: Define specific events that allow you to accelerate the note and demand full payment. These might include: revenue dropping below a certain threshold, the buyer selling assets, the buyer taking on additional debt without your consent, or the buyer missing two consecutive payments.

Building a Business That's Worth Buying

The best way to avoid relying on seller notes is to build a business that's attractive enough that buyers compete for it. When you have multiple offers, you have leverage to demand better terms-more cash upfront, smaller notes, better rates.

That means clean financials, documented processes, and a business that doesn't depend entirely on you. If you've built a lifestyle agency where you're the only salesperson and the clients only know you, good luck getting a buyer to pay full price in cash.

Buyers want businesses that can run without the founder. Systems, processes, documented workflows. A team that knows what they're doing. Clients who are under contract and not dependent on personal relationships.

If you're a few years from exit, start building those systems now. Document everything. Hire people who can do what you do. Remove yourself from day-to-day operations. The more turnkey your business, the better your deal terms.

When buyers see that the business will survive without you, they feel safer writing a bigger check at closing. When they worry the whole thing falls apart the day you leave, they want you on the hook with a big seller note.

Building Your Buyer Pool

Here's a counterintuitive strategy: market your willingness to offer seller financing before you even have a buyer. .

This expands your buyer pool. You're not just attracting buyers with $500K cash. You're attracting buyers with $300K cash who can finance the rest.

More buyers means more competition. More competition means better terms for you-higher price, better rates, larger down payment.

The trick is to position it as conditional: "Seller financing available to qualified buyers." You're not committing to finance everyone. You're saying it's possible if the buyer meets your standards.

Then you vet hard. Financial statements, credit reports, references from previous deals, detailed business plan. If they can't provide those things, they don't qualify for your financing.

One seller I advised sold his business for 15% above asking price because he had four buyers competing, all of whom needed seller financing. He used the competition to negotiate a 60% down payment and a 3-year note instead of 5 years. That's the power of optionality.

Building your buyer pool is like building a lead list-you need specific criteria and you need volume. When I need leads for cold email campaigns, I post on Upwork with exact specifications: company revenue range, follower count, verified emails, usually $15 per 100 leads. I hire three or four freelancers simultaneously to do the same job because competition breeds quality. For seller financing, you should be building a list of 50-100 qualified potential buyers before you even list the business. One client I worked with had a SaaS tool and we identified every company that had linked to their competitor-that's your buyer pool right there. You want buyers who already understand your space and have demonstrated they can execute.

The Tax Side (Talk to Your CPA)

Seller notes can offer tax advantages through installment sale treatment. Instead of recognizing the entire capital gain in the year of sale, you recognize it proportionally as you receive payments.

This can drop you into a lower tax bracket and reduce your overall tax liability. But the rules are complex, and not every seller note qualifies. Your CPA will need to structure the deal correctly.

I'm not a tax advisor, but on one exit, spreading the proceeds over four years saved me about $40K in taxes compared to taking it all upfront. That's real money.

There are also estate planning advantages. If you're older and worried about estate taxes, spreading the proceeds over multiple years can help. Your CPA and estate attorney can structure the note to minimize your overall tax burden.

Just make sure the interest rate on your note meets IRS minimums. If you charge below-market interest, the IRS can impute interest income that you have to pay tax on anyway. Your CPA will know the applicable federal rate (AFR) that applies.

Finding Buyers Who Can Close

If you're selling a business, the quality of your buyer pool depends on how you find buyers. Listing your business on Flippa or other marketplaces gets you lots of tire-kickers. Working with a business broker who vets buyers gets you serious people.

You can also find potential buyers proactively. Who's in your industry and might want to expand? Who's your biggest competitor? Who's a complementary business that could bolt you on?

I've found buyers through my network, through cold outreach, and through brokers. The best buyers came through my network-people who already knew the business and had the capital to close.

If you're a few years from exit, start building relationships with potential buyers now. Go to industry events. Join mastermind groups with successful operators. Make yourself visible. When you're ready to sell, you'll have a list of qualified buyers to reach out to.

For lead sourcing and prospecting, I use ScraperCity's B2B database to find potential strategic buyers and their contact information. You can filter by industry, company size, and location to build a targeted list of companies that might want to acquire yours.

The buyers who can actually close are the ones who show up. I have a three-strike rule: if someone doesn't show up to a scheduled call three times, I send a breakup email and move on. I've learned that people who waste your time in the courtship phase will waste your money in the business phase. When I'm booking meetings, I send three separate reminders-one the day before, one an hour before, and one five minutes before with the Zoom link. If they still don't show, I call twice and then I'm done. Use this same framework with potential buyers: the ones who can't respond to emails promptly, who reschedule repeatedly, or who go dark for days at a time? They're showing you exactly how they'll handle their note payments. Trust the pattern.

Final Thoughts

Seller notes aren't inherently bad. They're a tool that makes deals happen. But you need to go in with your eyes open.

Understand that you're taking risk. Price that risk into your terms. Vet the buyer like your financial future depends on it-because it does. And build protections into the deal structure so you're not left holding an empty bag if things go south.

I've made good money on seller notes, and I've had headaches with them too. The key is knowing when to use them and when to walk away. If you're prepping for an exit and want feedback on deal structure, I work through scenarios like this inside my coaching program with founders who are in the thick of it.

Remember: a seller note is only as good as the buyer's ability and willingness to pay. Everything else is just paperwork. Choose your buyer carefully, structure the deal to protect yourself, and you'll get paid. Rush into a deal with a sketchy buyer because you want out, and you'll regret it for years.

I've done five exits. The ones where I took time to vet the buyer and structure solid terms worked out. The one where I rushed because I was tired of the business cost me months of stress. Learn from my mistakes.