Seller note, explained simply
It bridges funding gaps and signals the seller’s confidence in the business. It is typically subordinated to the senior lender, may be on standby for an initial period and often carries a right for the buyer to offset valid indemnity claims.
In SBA 7(a) acquisitions, seller notes are common but subject to SBA rules on standby periods and on how much they count toward the buyer’s equity. These rules change, so the current SBA guidance should be checked.
Price paid at closing and deferred
IllustrativeAlder Creek Manufacturing, $ millions
The note is repaid over five years at 7%, after the senior loan is serviced.
Typical features
- Term: often 3 to 7 years
- Interest: an agreed rate, paid regularly or at maturity
- Ranking: usually repaid after the senior lender (subordinated)
- Standby: lenders may require payments to pause for a period
- Offset: the buyer may reduce payments for valid indemnity claims
Worked example
The LOI includes a $4.0 million seller note: five years at 7%, repaid only after the bank loan is serviced, with no principal payable for the first two years. After closing, a $0.1 million pre-closing tax issue is found, and the buyer sets it off against the note under the purchase agreement.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
A seller note shows confidence, closes funding gaps and gives the buyer a practical way to recover money if issues appear later.
Red flags
- A seller unwilling to accept any note, which may signal doubts about future performance
- Note terms that conflict with the senior lender’s requirements