In a startup or lower-middle-market acquisition under $100 million, a seller note lets the buyer pay part of the purchase price after closing. The buyer needs less cash at closing, while the seller becomes a creditor whose ability to collect depends on the borrower, deal documents, and any senior financing. Buyers and sellers should negotiate those terms before treating deferred payment as equivalent to cash.
A seller note works best when the parties define who owes the money, when payments are due, and what happens if the buyer cannot pay. Those decisions belong in the LOI discussion, before the purchase agreement and financing documents are drafted.
A seller note is a promissory note for a deferred portion of an acquisition purchase price. The named borrower promises to pay the seller under an agreed schedule, generally with interest. The borrower may be the acquisition entity rather than its parent or individual owners, so the seller should check exactly which person or entity owes the debt.
A note may be unsecured or backed by specified assets or equity. A guaranty is a separate promise by a parent entity or individual to pay if the borrower does not. A guaranty or lien helps only to the extent the transaction documents, existing debt, applicable law, and guarantor’s or collateral’s value support recovery.
A seller note reduces the cash a buyer must provide at closing, but adds future debt service. A buyer may seek a negotiated setoff right to apply a valid indemnification claim against note payments. The purchase agreement and note should specify which claims qualify, what notice is required, and whether the buyer can withhold disputed amounts. An unrestricted withholding right can make the seller’s payment schedule unreliable.
The seller receives a contractual claim for principal and any agreed interest, rather than the entire price at closing. Unlike an earnout, note payments ordinarily do not rise or fall with post-closing performance unless the parties expressly tie them to it. The seller still faces nonpayment risk, particularly if senior debt restricts payments or has a prior claim on collateral.
Buyers and sellers should test the proposed payment schedule against expected cash flow and any lender restrictions. Interest, repayment, and security terms vary with the transaction documents, financing, and parties’ circumstances.
Consider a hypothetical $10 million acquisition funded with $7 million in cash at closing and a $3 million seller note. For illustration, assume 6% annual interest, a $500,000 principal payment at the end of each of the first three years, and a fourth-year payment of $1.5 million in principal, including a $1 million balloon. The outstanding principal after years one, two, and three would be $2.5 million, $2 million, and $1.5 million, respectively. At maturity, the buyer would owe $1.5 million in principal, including the $1 million balloon, plus interest due under the note.
The buyer needs $7 million rather than $10 million at closing but must budget for installments and the final balloon. The seller receives cash at closing and a right to future payments, subject to the buyer’s ability to pay and any restrictions imposed by senior debt.
A seller note may fit a founder-led acquisition when the buyer cannot or does not want to fund the full price at closing and the seller is willing to assess the buyer’s credit risk. It also adds debt, so the parties should test whether projected cash flow can cover payments and whether acquisition lenders permit the note. Seller willingness, lender consent, and acceptable protections are deal-specific, including in transactions under $100 million.
Start by identifying the borrower and assessing whether a parent or personal guaranty is available. A guaranty is not collateral. The security documents must identify the pledged assets or equity, and counsel should assess how the security interest attaches, how to perfect it, and whether existing liens limit its value. For some personal-property collateral, a UCC financing statement is needed to perfect the security interest. Filing alone does not establish first priority, and the required steps depend on the collateral and applicable law. Senior loan and subordination documents may give another lender priority or block seller-note payments after specified defaults. Counsel should reconcile those documents with the note before the seller relies on a proposed lien or remedy. Zecca Ross Law Firm P.C. can review the purchase agreement, note, guaranty, security documents, and senior-lender restrictions together. That review can identify payment blocks or enforcement rights that conflict across documents before the parties sign them.
A seller note does not require the founder to remain involved after closing. If the buyer wants transition assistance, the parties should set out the founder’s duties and compensation in a separate agreement rather than assume that financing the purchase will secure ongoing help.
Review the note for problems that become harder to fix after closing:
Before signing an LOI, buyers and sellers should identify the financing assumptions that could change the deal. Zecca Ross Law Firm P.C. can help founders in transactions under $100 million decide which terms to address in the LOI and which details to leave for definitive documents.
M&A counsel can then coordinate the LOI, purchase agreement, note, guaranty, security documents, and any subordination agreement. Counsel should also check which perfection steps apply to the proposed collateral and whether senior-lender consent or a subordination agreement is needed before the seller can receive payments or enforce a lien.
These structures defer value in different ways. None gives the seller the same payment certainty as cash at closing.
A buyer may combine a note, earnout, and rollover equity. The agreements should then specify whether an indemnification setoff affects note or earnout payments and what rights attach to the seller’s equity.
Zecca Ross Law Firm P.C. represents buyers and sellers in startup and lower-middle-market M&A transactions under $100 million, including founders in Arizona and California. As a boutique, lawyer-led alternative to template-driven services and BigLaw staffing models, the firm offers direct senior-attorney involvement in reviewing purchase agreements, notes, and lender restrictions. Where appropriate, a defined flat-fee or capped-fee scope gives founders clearer expectations about the work and its cost; the scope must still reflect the deal’s complexity. Sellers should consult qualified tax advisers about whether installment-sale reporting is available and how interest, potential depreciation recapture, and other transaction-specific tax rules apply. M&A counsel can coordinate the deal documents with that advice but does not replace transaction-specific tax advice.
If you are considering seller financing, contact Zecca Ross Law Firm P.C. to discuss the proposed note and the purchase agreement.
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