Seller Financing: Why Most Main Street Deals Include a Seller Note

Most small business sales include some financing from the seller, and owners who refuse to consider it narrow their buyer pool and often lower their price. A seller note is a loan from the seller to the buyer for part of the purchase price, repaid with interest over several years. Understood and structured properly, it is a tool for closing at a better price. Structured carelessly, it is an unsecured promise.

Why seller notes are so common

Three forces produce them.

The financing gap. A bank will lend only what the cash flow and the valuation support. The buyer has limited equity. The seller note fills the difference between those two amounts and the price.

Confidence. A seller willing to leave money in the deal signals belief that the business will continue to perform. Buyers and lenders both read a refusal as a warning.

Alignment. A seller who is still owed money has a reason to make the transition succeed.

In a typical bank-financed Main Street transaction, the seller note represents roughly 5 to 20 percent of the price. In deals without bank financing, the seller may carry half or more.

The principal terms

A seller note is defined by a handful of terms.

• Amount. The share of the price deferred.
• Interest rate. Usually near or modestly above prevailing bank rates for acquisition loans.
• Term and amortization. Three to seven years is common, sometimes with a longer amortization and a balloon payment.
• Payment schedule. Monthly principal and interest is standard. Some notes begin with an interest-only period.
• Security. A lien on business assets, typically behind the bank.
• Guarantee. A personal guarantee from the buyer.
• Subordination and standby. The conditions under which the bank requires the seller to wait.

How SBA rules treat seller notes

Many Main Street acquisitions use SBA 7(a) loans, and the SBA's rules shape what a seller note can look like. The current rules took effect for loans numbered on or after October 1, 2026.

Equity injection. A first-time acquisition requires an equity injection of at least 10 percent of total project costs. A seller note can count toward that requirement only if it is on full standby, meaning no payments of principal or interest, for the entire term of the SBA loan. That term is usually ten years. Even then, seller debt and other limited sources together may supply no more than half of the required injection.

Notes that are not on standby. A seller note that receives payments is still permitted as part of the financing. It does not count as equity, and its payments are included when the lender tests debt service coverage. If such a note is interest-only, the lender must calculate coverage as though it amortized over ten years.

The valuation cap. Total debt in the transaction, including any seller note not on full standby, may not exceed the business valuation the lender obtains. A price above that valuation must be covered by buyer equity or by a seller note on full standby.

For sellers, the practical point is that there are now two distinct kinds of seller note in an SBA transaction. One is paid currently and behaves like ordinary subordinated debt. The other waits a decade and should be evaluated as a long-dated, at-risk receivable. Sellers should know which one a buyer is proposing before agreeing to a price.

The risks to the seller

A seller note is subordinate to the bank. If the business fails, the bank is paid first from the collateral, and there may be little left.

The bank's subordination agreement will also restrict what the seller can do on default. Commonly the seller may not accelerate the note, foreclose or sue without the bank's consent. Sellers should read this agreement with counsel before signing, because it governs their rights more than the note itself does.

How sellers protect themselves

Several protections are customary and worth negotiating.

1. Evaluate the buyer as a lender would. Review the buyer's credit, liquidity, experience and business plan. The seller is extending credit and is entitled to underwrite it.
2. Obtain a personal guarantee, and where appropriate a guarantee from a spouse or a pledge of other assets.
3. Take a security interest in the business assets and file it, even in second position.
4. Require financial reporting. Quarterly statements and annual tax returns allow the seller to see trouble early.
5. Include covenants. Limits on owner compensation, distributions, additional debt and sale of the business while the note is outstanding.
6. Consider life and disability insurance on the buyer, assigned to the seller, for the balance of the note.
7. Keep the amount proportionate. A note the seller could afford to lose is a different decision from one that funds retirement.

Possible advantages

Seller financing has benefits beyond making the sale possible. Businesses offered with seller financing tend to attract more buyers and support stronger prices, because the buyer's risk is lower. The note earns interest. And under the installment sale rules, a seller may be able to recognize part of the gain as payments are received instead of entirely in the year of sale. The tax treatment depends on the structure and the assets involved, and it should be confirmed with a tax advisor.

A note is different from an earnout

The two are sometimes confused. A seller note is a fixed obligation: the buyer owes the amount regardless of how the business performs. An earnout is contingent: the buyer pays only if agreed results are achieved. A note is the more certain of the two, and SBA rules permit seller notes while prohibiting seller earnouts.

How to think about the decision

The useful comparison is between complete offers. An all-cash offer at a lower price may or may not be better than a higher offer with 15 percent deferred. The answer depends on the strength of the buyer, the terms of the note, the protections obtained and the seller's own need for liquidity. Owners who decide in advance what they would be willing to carry, and on what terms, negotiate from a clearer position.

Twelve31 Advisors structures and negotiates seller financing on both sides of the table and coordinates with lenders on standby and subordination terms.