Learn · Selling · stop 8: Agree on the terms
Carrying a note. The part of the deal where you are the bank
The short version
- At this size, the seller often helps finance the sale. It surprises almost everyone the first time.
- A seller note means you get part of the price over years, with interest, paid out of the business's earnings. You are the bank for the business you know best.
- Sellers carry notes because it widens the field of buyers, can raise the total price and signals belief in the business.
- Sellers think carefully because a note is paid later, not at closing, and if the business struggles under the new owner the payments are at risk.
- When a bank loan is part of the deal, the bank has rules about your note. Some of them stop you being paid for a set period.
How deals this size get paid for
Few buyers write one check. A sale is usually paid for with some mix of the following.
- The buyer's own money. Savings, retirement funds, family capital.
- A bank loan. Often backed by the Small Business Administration, the federal agency that guarantees part of a loan so a bank will make it. The bank will want books it can verify.
- A seller note. You carry part of the price. The buyer pays you over time, with interest, out of the business's earnings.
- An earnout. Part of the price arrives later and depends on how the business performs after the handoff. A buyer using an SBA loan cannot offer one, because the program does not allow a price that depends on future performance.
- Keeping a piece. You keep a minority stake and stay along for part of the ride.
Most real deals combine two or three of these. The one that catches owners off guard is the note.
What a seller note actually is
A promissory note is a written promise to pay a set amount on a set schedule at a set interest rate. When you carry one, the buyer signs it in your favor at closing. You get the rest of the price at closing, and the note pays out over the following years.
Illustrative arithmetic. The price is $800,000. The buyer brings $80,000 of their own money and a bank lends $600,000. You carry a note for the remaining $120,000, paid over five years at an agreed rate. At closing you receive $680,000. The other $120,000, plus interest, arrives in monthly payments from the business you just sold.
The note is usually secured, which means that if the buyer stops paying, you have a claim on the business or its assets. It is usually behind the bank, which means the bank gets paid first if things go wrong.
Why a seller would carry one
It widens the field. Plenty of capable buyers, often the person you would most want running your shop, cannot raise the full price from a bank alone. A note closes the gap.
It can mean a better total price. A buyer who can pay part of the price out of the business's future earnings can often pay more overall than one who has to fund all of it at closing.
It says something. A seller willing to be paid from future earnings is saying that they believe the business works without them. Buyers notice. Lenders notice too.
It keeps you tied to the outcome. For an owner who cares where the business ends up, that can be a feature rather than a concession.
Why a seller would think carefully
You are paid later. A note means part of your money arrives over years, not at closing. If you need all of it on the day, a note does not fit.
Your payments depend on the buyer. If the business struggles under the new owner, the payments are what struggle first. Being behind the bank means you are the last to be paid if it goes badly.
You may not be paid for a while. When a bank counts your note as part of the buyer's down payment, the bank will usually require it to be on standby. That means no payments to you for a set period, or in some versions of the rule for the life of the bank loan. The rule has changed more than once in recent years. Which version applies is a question for the lender, and the answer changes what your note is worth.
It is a second relationship. A note ties you to the buyer for years. Carrying one for a buyer you chose, whose plans you have heard, is a different thing from carrying one for a stranger.
Where the rules come from
The SBA publishes its lending rules in a document called the standard operating procedure, usually shortened to SOP. The SOP sets what a bank can count as the buyer's own contribution, what a seller note has to look like to count, and how long it must sit on standby. Those rules have moved several times in the last few years, and they will move again.
Any piece of writing about seller notes is only as current as the SOP it was written under. Before you agree to terms, ask the buyer's lender which SOP version governs the loan and what it says about seller notes. Then ask your attorney to read the note against it.
The question nobody can answer for you
Whether to carry a note depends on your deal, your finances, your appetite and the buyer in front of you. No piece of writing can tell you. That is a conversation for your accountant and your attorney when a real offer is on the table.
What this piece can do is make sure the first time you hear the words "seller note" is not the moment someone slides one across the table.
Take this to your own people
The questions for this topic, for your attorney, your accountant or your lender.
- Your accountant. If I carried a note for part of the price, how would it be taxed, and how does that compare with being paid in full at closing?
- Your attorney. What security would I have if the buyer stopped paying, and where do I stand relative to the bank?
- The buyer's lender. Which SOP version governs this loan, and what does it require of a seller note that counts toward the buyer's contribution?
Figures are illustrative arithmetic, not an appraisal or an offer. Rules on seller notes and earnouts under SBA-backed loans change by SOP version; confirm the version in force with the lender before agreeing to terms.
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