What it means
The mechanism is simple: the seller becomes a lender. Ownership transfers on day one, but a slice of the price sits as a debt owed back to the seller, usually secured against the very assets that were sold.
Buyers like it because it closes funding gaps. Banks often lend only against hard assets, so a business bought largely for its customer relationships or brand can leave a shortfall that only the seller is willing to bridge.
Sellers accept it for three reasons: it widens the pool of buyers, it often supports a higher headline price, and it spreads the tax on the gain over several years rather than concentrating it in one. The trade-off is real risk, because a buyer who runs the business badly may not be able to pay.
The commercial terms usually mirror bank lending. There is an interest rate, a term of three to seven years, a repayment schedule, security over the assets, and often a personal guarantee from the buyer plus covenants restricting large dividends until the note is repaid.
A common variant pairs seller financing with an earn-out, where part of the price depends on future performance. The two are different: an earn-out is contingent consideration that may never be paid, while a seller note is a fixed obligation that must be repaid regardless of how trading goes.
In practice
Real-world examples.
Example
A retiring dental practice owner sells for $1,400,000 with a bank funding $800,000, the buyer contributing $350,000 and the seller financing the remaining $250,000 over four years. The seller note is subordinated to the bank, so the bank must be repaid first if anything goes wrong.
Example
A commercial landlord sells a small industrial unit to a tenant who cannot get a mortgage quickly enough. The landlord accepts 25% down and carries the balance at 8% for three years, at which point the buyer refinances with a bank.
Example
A founder selling a digital agency agrees a $2,000,000 price with $600,000 deferred as a seller note. The note includes a clause allowing the buyer to offset any warranty claims against the outstanding balance, which gives the buyer practical protection without a separate escrow.
Formula
Calculation
Seller note = purchase price - buyer deposit - third party debt
Annual interest = outstanding note balance x interest rate
An owner sells a specialist engineering firm for $900,000. The buyer puts in a 30% deposit of 900,000 x 0.30 = $270,000, and the seller finances the remaining 900,000 - 270,000 = $630,000 through a promissory note at 7% interest over five years.
Repayment is structured as five equal annual principal instalments of 630,000 / 5 = $126,000, plus interest on the outstanding balance. In year one, interest is 630,000 x 0.07 = $44,100, so the total payment is 126,000 + 44,100 = $170,100 and the balance falls to 630,000 - 126,000 = $504,000.
In year two, interest is 504,000 x 0.07 = $35,280 and the payment is 126,000 + 35,280 = $161,280. Across the full five years the seller earns interest on balances of $630,000, $504,000, $378,000, $252,000 and $126,000, which sum to $1,890,000; at 7% that is 1,890,000 x 0.07 = $132,300 of total interest on top of the $630,000 of principal.Case study
Seen in the real world.
Harbourgate Marine Services is an illustrative, fictional boatyard business sold by its founder for $1,800,000. The buyer, a former operations manager, secured $900,000 from a bank and had $360,000 of his own money, leaving a $540,000 gap that the founder agreed to finance at 6% over six years.
The founder structured the note carefully. Payments were interest-only for the first year at 540,000 x 0.06 = $32,400, giving the new owner breathing room, after which principal of $108,000 a year began alongside interest. The note was secured over the yard's equipment, ranked behind the bank, and included a covenant capping owner drawings at $120,000 a year until the balance fell below $200,000.
The fictional outcome was that the buyer traded well, cleared the balance ahead of schedule in year five by refinancing, and the founder collected roughly $123,000 of interest for a risk he understood better than any bank could. The structure worked because the seller knew exactly what the business could service.
Watch out
Common mistakes.
- Treating a seller note as a formality rather than a real loan, and skipping security, guarantees and covenants that a bank would insist on.
- Buyers agreeing repayment schedules that ignore working capital seasonality, then missing a payment in the quietest trading quarter.
- Confusing a seller note with an earn-out, so the parties argue later about whether performance affects the amount owed.
Questions
People also ask.
Why would a seller agree to be paid later?
Because it usually attracts more buyers, supports a stronger price, and can spread the tax on the gain across several years.
What happens if the buyer defaults?
The seller enforces the security in the note, which in a business sale often means taking the company back, though its value by then may be considerably lower.
How large is a typical seller note?
Commonly 10% to 30% of the purchase price, sized to bridge the gap between bank funding and what the buyer can put in.
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