What is a seller's note when selling your business?

A seller’s note is when you, as the seller, agree to receive part of the sale price over time rather than all of it at closing. Instead of the buyer paying you in full on day one, they pay you in regular installments over a set period, with interest. The buyer is essentially borrowing part of the purchase price from you, and you become their creditor.

[INTERNAL-LINK: see how seller financing fits into a full deal structure → financing/how-does-seller-financing-work]

How seller’s notes are typically structured

Seller’s notes in small business sales most commonly represent 10% to 30% of the total purchase price. The term is typically 3 to 7 years. Interest rates are generally in the 6% to 8% range, partly because the IRS requires a minimum rate (called the Applicable Federal Rate) for seller-financed transactions.

The remainder of the purchase price comes from a combination of the buyer’s own cash and bank financing, often an SBA loan. A typical deal structure might look like this: 70% from an SBA lender, 10% from the buyer’s cash, and 20% as a seller’s note. Without the seller’s note, the buyer may not have enough financing to close the deal at all.

Why buyers ask for seller’s notes

Most individual buyers purchasing a trades business for $1 million to $5 million don’t have the full purchase price in cash. They need bank financing to cover most of it. SBA lenders often require the seller to carry a note as a condition of approval, viewing it as evidence that the seller is confident enough in the business to remain financially exposed after the sale.

In practical terms, a seller’s note often makes the difference between a deal that gets done and one that falls apart at financing. If you refuse to carry any note, you may narrow the pool of buyers who can actually close, which can affect both deal speed and final price.

[INTERNAL-LINK: understand how the total payment structure affects your proceeds → valuation/how-much-can-i-expect-to-sell-my-business-for]

What a seller’s note means for your risk

Accepting a seller’s note means you are now a creditor to the buyer. If they run the business poorly after closing and cash flow drops, your payments are at risk. Unlike a bank, you don’t have a dedicated collections department or legal team standing by. Enforcement takes time and money.

Seller’s notes are typically secured by a personal guarantee from the buyer and a security interest in the business assets. The personal guarantee means you can pursue the buyer individually if the business defaults. The security interest gives you a legal claim on the assets. In practice, both protections are meaningful but imperfect. A business that has declined significantly may not have enough value to cover what’s owed to you.

The difference between a seller’s note and an earnout

These two terms are sometimes confused, but they work very differently.

A seller’s note is a fixed obligation. The buyer owes you the agreed amount on the agreed schedule regardless of how the business performs. If revenue drops 30% after closing, your monthly payment doesn’t change. The note is more predictable, though not without risk.

An earnout is contingent. You only get paid if the business hits specific performance targets. If it doesn’t, you collect nothing on that portion. Earnouts carry more uncertainty because the payout depends on both business performance and buyer decisions made after you’ve handed over control.

In general, a seller’s note is the more predictable of the two. But both involve receiving less money at closing and accepting post-close risk.

[INTERNAL-LINK: understand how earnouts compare to notes → selling/what-is-an-earnout]

What to negotiate before you agree to carry a note

Not all seller’s notes are structured the same way, and the terms matter. Before agreeing to carry a note, make sure the following points are addressed.

The interest rate should reflect the risk you’re taking. The personal guarantee should be absolute rather than limited. The security interest should be properly filed (your attorney handles this). The note should specify what happens if a payment is missed, including a cure period and the right to accelerate the full balance if default continues.

Consider asking for the seller’s note to be subordinate only to the SBA loan, not to any future financing the buyer might take on. A buyer who refinances the business and takes on new debt after closing could put your repayment at risk if your note has no protections.

Your attorney should draft or review the promissory note before you sign anything. The negotiating leverage you have is at the deal stage, not after the closing.

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Common questions owners ask

What interest rate should I charge on a seller's note?

The IRS sets a minimum interest rate for seller-financed transactions called the Applicable Federal Rate, or AFR. If your interest rate falls below the AFR, the IRS will impute interest and tax you as if you charged the minimum rate anyway. As of 2025, rates for seller notes are typically in the 6% to 8% range, but your CPA and attorney should confirm the current AFR when structuring the deal. Most seller notes are negotiated within or slightly above this range.

What happens if the buyer defaults on the seller's note?

If the buyer stops making payments, you have the right to pursue them based on what's in the promissory note and security agreement. This typically includes a personal guarantee from the buyer and a security interest in the business assets. In practice, enforcing these rights takes time and legal costs. Repossessing a business is complicated, and the business may have deteriorated by the time you can act. The best protection is thorough due diligence on the buyer before closing, not after a default.

Can a seller's note be paid off early?

Early payoff provisions should be addressed in the promissory note. Some notes allow the buyer to prepay without penalty. Others include a prepayment penalty to compensate the seller for lost interest income. If early payoff terms aren't specified in the note, disputes can arise. Have your attorney address this in the promissory note language. As a seller, you generally want to allow early payoff, since receiving the remaining balance early is better than waiting for scheduled payments.