Glossary
Seller note
Part of a business purchase price that the seller agrees to be paid over time, rather than at closing. A financing instrument and, just as importantly, a signal about whether the seller believes the business will keep performing.
Seller note: Part of a business purchase price that the seller agrees to be paid over time, rather than at closing. A financing instrument and, just as importantly, a signal about whether the seller believes the business will keep performing.
Why it matters
Seller notes do three jobs at once. They bridge a funding gap, they can count toward your equity injection when placed on full standby, and they keep the seller financially interested in the handover going well.
That third job is the one buyers undervalue. A seller who refuses any note is telling you something. Someone confident the business will perform under new ownership is usually willing to carry part of the price.
How it fits the structure
In a typical SBA-financed small acquisition the price is assembled from an SBA 7(a) loan, the buyer's own cash, and a seller note — with the note frequently on full standby so it counts as equity.
| Term | What to negotiate |
|---|---|
| Amount | Often a meaningful slice of the price. More note means less cash from you, and more seller skin in the game. |
| Standby | Full standby for the SBA loan's term is what makes it count as equity. Partial standby is sometimes acceptable; confirm with the lender first. |
| Interest | May accrue during standby and amortize afterwards. |
| Subordination | The note sits behind the SBA loan. Non-negotiable in practice. |
| Offset rights | Worth having: the ability to reduce the note if the seller's representations turn out to be wrong. |
The protection buyers forget to ask for
An offset or setoff right lets you reduce what you owe on the note if something the seller promised proves untrue — undisclosed liabilities, overstated revenue, a key customer who was already leaving.
Without it, your only remedy is suing a seller who has your money. With it, you simply stop paying the note. It is the most practically useful protection in a small acquisition and it has to be negotiated before signing.
What to ask before you sign
- Will the lender accept this note on full standby, and in what form?
- Does the note carry an offset right against breaches of the purchase agreement?
- Is the seller staying on for a transition, and is that tied to the note?
- What happens to the note if I sell the business before it is repaid?