We are open to offering seller financing to help the buyer secure their senior bank debt, but we want to maximize our yield without choking the company's cash flow. How do we structure the interest and payment schedule?

Question

Tyler Smith · Accepted Answer

Offering seller financing is a powerful way to close a valuation gap, but you must structure the note to protect your capital and generate a real return. To maximize your yield without choking the company cash flow, you should use a tiered interest rate structure. Start the note at a reasonable rate that matches current bank senior debt pricing, then increase the rate by two percentage points every twelve months. This step-up structure incentivizes the buyer to refinance the note early and pay you out. You should also demand a payment structure that includes a cash pay portion and a payment-in-kind portion. For example, if the total interest rate is ten percent, require six percent to be paid monthly in cash, while the remaining four percent is added to the principal balance of the note. This keeps the immediate cash drain on the company manageable while still growing your total payout. Ensure the note is secured by a junior lien on the assets of the business. By structuring the seller note with these specific financial parameters, you protect your principal, maximize your yield, and keep the buyer focused on operational execution.