Seller financing is a critical part of most small business sales. If your business is under $10M in equity value, chances are very high that the buyer will be using an SBA 7(a) loan. And guess what comes with almost every SBA-backed deal?
A seller note.
That note usually covers 10–25% of the purchase price. In higher-risk deals (think customer concentration, key-person risk, or shaky financials) it could be 50% or more.
Now, here's where things often go sideways:
The seller agrees in principle to carry a note. Everyone's on board. Then the seller's lawyer steps in late in the game, reviews the draft note, and starts treating it like a standard debt instrument. The kind you'd expect if their client had just cut a $500K check to some random borrower.
Except they didn't.
A seller note isn't a loan. At least not a cash or tangible value loan. And trying to treat it like one is the fastest way to poison a deal and ruin the buyer-seller goodwill that's essential to a smooth transition.
What Seller Financing Actually Is
Seller financing in a small business acquisition is better thought of as a deferred payment plan. You're not lending the buyer cash. You're allowing them to pay part of the purchase price over time, usually because that structure increases the total price you're able to command. So essentially you are lending them a part of the asset value of the intangible assets of your business (goodwill, customer relationships, etc.) and that intangible value is based on the representations and warranties that you make in the due diligence and negotiation process.
The buyer gets more favorable terms. You get a higher headline number (and potentially some capital gains tax savings). Everyone wins if everyone understands what this really is.
The note is structured as debt because it offers some protection if things go sideways. But it's not a bank loan, and it's not meant to function like one.
So What Makes a Seller Note Different?
Here's a short list of terms you'll often see in a seller note that would be considered unthinkable in a traditional loan:
- Subordination to senior lenders (required in SBA deals and most conventional debt structures)
- Partial holdback where up to 5% of the business value may be on hold until after the senior loan is paid down
- Performance-based offsets if reps and warranties turn out false (e.g., a key customer leaves, lawsuit hits, equipment fails)
- Standby periods of 2 or more years where payments may be interest-only or completely suspended
- Debt Service Coverage Covenants that make loan payments optional in years where business net profit isn't enough to cover the payments
- Forgiveness clauses tied to operational disruptions or reduced cash flow
To a commercial lender, that would look like a horror show. But in the context of a business sale, these terms are not only normal, they're fair.
Because again, you didn't lend money. You sold an asset, and part of the value of that asset turned out to be, let's say... aspirational.
Why This Matters
Let's say you sold your business for $2M with a 10% seller note ($200K). And one week after the sale, the $500K customer you swore was rock solid decides to bolt. That customer represented $80K in profit.
Now the buyer has to scramble to plug the hole. They may still succeed long term. But the business they bought is not the business you promised. The value of what you sold was lower than agreed.
In that case, should the buyer still be on the hook to pay you the full $200K? Of course not.
That $200K wasn't a loan. It was a bet on the real value of the business. And if part of that value disappears due to something you missed or misrepresented (intentionally or not) the buyer shouldn't be the one holding the bag.
Why Seller Note Negotiations Can Kill the Deal
Here’s one more important but often overlooked piece: in SBA deals (and frankly, most underwritten transactions) the seller note isn’t just a financing mechanism. It’s a signal.
When an underwriter sees a seller willing to carry part of the note, it reads as:
“I believe in the business. I believe it will thrive under new ownership. I’m willing to put some of my upside on the line to prove it.”
That signal is especially critical in businesses where much of the value is intangible; goodwill, key relationships, brand, etc. In those cases, the bank is underwriting not just cash flow, but narrative: does this story hold water?
So when a seller or their counsel comes in late in the game trying to aggressively collateralize the note, add personal guarantees, or demand bulletproof protections, it sends a very different message:
“Actually, I’m not confident this business will keep performing. And I want my money back, no matter what.”
To the bank, that can be a red flag. It can trigger tighter conditions, delay the closing, or worst case, kill the deal outright. All because a note meant to express confidence got twisted into a courtroom-style loan doc.
The Bottom Line
If you're a seller (or a seller's lawyer), don't treat the seller note like a senior loan. It's not. It's a tool that allows a deal to happen at a better price, with protections for both sides.
Get it wrong, and you risk blowing up the deal or worse, closing on bad terms that come back to bite you.
Get it right, and you create a clean exit, a strong buyer relationship, and a legacy that lasts.
