One of the first things sellers say is, “I want to sell so I can stop worrying about the business. Why would I finance it?”
It’s a fair question. However, a Seller Note is often the tool that bridges the gap between the price you want and the price the bank will approve.
The Typical “Capital Stack”
In a $5 Million acquisition, the money usually comes from three buckets:
- Bank Loan (SBA/Conventional): 75% – 80%
- Buyer Cash Injection: 10% – 15%
- Seller Note: 10% – 15%
Why Carry a Note?
- The Price Validator
SBA lenders often require the seller to carry a note. It signals to the bank that you believe the business will survive the transition. If you refuse, the bank may deny the loan, killing the deal.
- Interest Income
A seller note isn’t free money. It acts like an investment. You typically earn interest (often 6%–8% or higher) on that note.
- Example: On a $500k note at 7% interest over 5 years, you earn an additional **$90,000+** in interest income.
- Tax Deferral
You only pay taxes on the principal of the note as you receive it. This allows you to spread your tax liability over several years rather than taking the full capital gains hit in Year 1.
The Security
We never recommend carrying a note without protection. We structure these notes to be secure:
- Personal Guarantee: The buyer is personally liable.
- UCC Filing: You keep a lien on the business assets (usually in a second position behind the bank).
- Acceleration Clauses: If they miss a payment, the full amount becomes due.
A buyer using leverage (bank loans) can afford to pay you a higher multiple than a buyer paying all cash. The Seller Note is the key that unlocks that leverage.