Why would a someone selling a solid business agree to a seller note?

February 20, 2025

by a searcher from Harvard University - Harvard Business School in Washington, DC, USA

I've had this conversation with a few people, including brokers, and haven't come out with great clarity. I see people post about doing transactions with 60-80% seller notes, and yet, brokers always laugh at me when I mention seller notes and act like most buyers do deals without them. Who is telling the truth?!

I understand the tax benefits for the seller, but I'm not sure they offset the benefits of having cash on hand that they can use or invest -- especially if they are retiring.

Same with interest payments leading to a higher purchase price - not sure that's worth waiting around for the 5-10 years that the SBA mandates.

So what am I missing? What are some truly compelling reasons that a seller with a GOOD business with many interested buyers will hold a seller note for you?

Sincerely,
A Confused Searcher Just Trying To Get A Deal Done

(posting anonymously because I'm actively conversing with people on this site about deals)

Reply by a searcher
in Chicago, IL, USA

It depends on the business, the Buyer and the Seller - I’ve personally closed good deals as high as 90% seller financing (let me explain)…

If a business is used to carrying large notes, like machinery leases, mortgages, investor notes, etc., there’s a good chance it may be desensitized to the potential risk of a seller note.

As the Buyer, if I want the Seller to carry a large note it’s my job is to earn their trust and make a relevant and appealing case as to why. This might be through industry experience, finding a business that has a road block which would inhibit other buyers or traditional financing, or it can even be as simple as them receiving interest payments rather than a bank. Maybe I have growth plans or am building a rollup that there is a compelling case for rollover equity. Maybe I only make rollover equity an option if they’ll carry a larger note.

The biggest part of achieving a high seller note though, typically comes down to the Buyer archetype, which means it comes down to your qualifying criteria. Old school owners, someone who has extracted enough value from the business that it’s more about time freedom or legacy than money, or someone who understands the tax implications.

There are hundreds of reasons why someone will take a large seller note, message me and we can connect in more depth.

Reply by a professional
from University of Virginia in Holmes, NY 12531, USA

Thanks, ^redacted‌ and excellent points from Brad, above. I think you *mostly* answer your own question. If a seller is in a position to get its desired purchase price entirely in cash at closing, and isn't concerned with any effort to defer some of the taxes, I think you're hard pressed to find an objective, financial-based motivation for providing seller financing. I would say that in this space, you don't want to discount the "emotional" rationales (even if your job is to raise questions about such rationales). I've seen sellers who thought it was compelling to throw in some seller financing in order to get their particular desired buyer, which couldn't do all cash as other bidders could. Once or twice I've seen sellers view it as a mechanism of keeping a hand in the biz (though here, for sure, I think there are better ways). And ultimately, there's the market mechanism to consider. In a frothy buyers' market, seller financing can well become near-standard and it's hard to move off it regardless of the quality of the business. Good post, it's a legit question.

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