Why Buyers Ask
Most small company purchases are paid with cash from the buyer, a bank or government backed loan and sometimes a note from the seller. Lenders often want to see the seller keep some skin in the deal, and buyers like the lower cash they need at closing.
A seller note is also a vote of confidence in the business. A buyer who sees you decline to carry any paper may wonder why.
Typical Terms
- A note for ten to thirty percent of the price, though the amount varies
- A term of three to seven years with monthly payments
- An interest rate that is set by the buyer's lender or the market
- Payments that start after a short pause, or after the bank loan is paid down
Lenders may require the seller note to sit behind the bank loan, which limits what you can do if the buyer stops paying.
Security and Guarantees
Ask what secures the note. Options include a lien on the assets, a personal guarantee from the buyer and a pledge of the shares. The stronger the security, the less risk you carry.
A buyer with strong credit and real cash in the deal is safer than one who puts little down.
Earnouts and Performance Terms
Some buyers propose that part of the price depends on future results. These earnouts can bridge a gap when you and the buyer disagree on value. They also shift risk to you, since the buyer controls the business after closing.
If you accept one, define the measure in writing, set reporting rights and limit changes the buyer can make that hurt the result.
Protections for the Seller
- Late payment fees and a short cure period
- The right to see financial statements during the note term
- Limits on selling the business or taking big distributions while the note is open
- Acceleration if the buyer sells the company
Tax and Timing
Receiving payments over time can spread the tax across years under installment rules. Your CPA can show how that compares with a lump sum. Keep the old company alive if it holds the note, as described in articles of dissolution after an asset sale.
Documents to Expect
A seller note comes with a promissory note, a security agreement and sometimes a guarantee. Have your attorney draft or review each one, and record any lien so it is public. Skipping this step is a common and costly shortcut.
When to Say No
If a buyer cannot show experience, cash and a plan, a large seller note may be worth little. Ask your broker to qualify buyers early so you know who can handle the terms. The structure also interacts with your choice of an asset sale or stock sale.
This page is general information, not tax or legal advice. Confirm terms with your attorney and CPA. To see what your company might sell for, ask for a confidential estimate.