Seller Concern About Risk in Seller Note – Looking for Benchmarks & Mitigation Strategies

April 15, 2025

by a searcher from INSEAD in Dubai - United Arab Emirates

Hi everyone, I’m currently in talks with a seller who’s expressed some discomfort with the idea of a seller note. He’s open to the concept, but is seeking reassurances to reduce his risk. To help move things forward, I’m looking to: 1. Benchmark typical seller financing terms – % of purchase price, interest rate, repayment period, and any security structures used 2. Identify effective risk mitigants that have worked in your experience – e.g., guarantees, covenants, escrow, etc. Would appreciate any benchmarks, references, or examples from the community. Thanks in advance!

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Reply by a searcher
from INSEAD in İstanbul, Türkiye

Hi Emile, While others are more qualified to give benchmarks, happy to opine on the other topic. Firstly, you should highlight to the seller that he knows his business best and its risk of defaulting to the loan (he should share "market downturn risk" and you're obviously protecting against a dud). If they worry about your ability to manage, answer that you have a strong list of investors that would not let you mismanage the business. Putting that aside, having the annual payments equate to a percentage (e.g. 50%) of current FCF gives sufficient comfort in a small downturn of business. In a deal I have at the moment, I agreed to transfer 50% of net income (post everything) to an escrow that will be used to pay the vendor note. I also pledged shares whose value equate to 150% of the vendor note as collateral (eg USD 3m of shares against USD 2M of vendor note). Hope this helps.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

My advice would be to inform the seller that part of the reason for the seller note is to give you and the lender confidence that the seller is confident in the business and is willing to stand behind the business. The seller would be in a second position behind the Bank and the note would need to be fully subordinate to the senior lender. You could chose to personally guarantee the seller note. That is your choice. I probably see a personal guarantee on a seller note around 40% of the time. As for seller note terms, it is all about what you can negotiate. What we see most often is a 10% seller note with a term of between 5 and 10 years and an interest rate in the 5% to 8% range. There is lots of flexibility on how you structure the seller note. Typically you want the terms to be the same or better than what you have with financing. You need to be sure the seller note will work with the cash flow and debt service cover ratio your lender is looking for. There are all sorts of creative seller notes you can use, including forgivable seller notes, multiple seller notes with different structures, as well as varying amortization or seller notes with longer amortizations but a shorter term called a balloon. If you would like to discuss options in more detail I would be happy to discuss. You can reach me here or directly at redacted

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