The buyer is asking us to carry a 20 percent seller note, but we want a clean cash exit. When does seller financing actually make sense for an owner, and how do we protect our position if we agree to it?

Question

Tyler Smith · Accepted Answer

Seller financing is not a failure of negotiation; it is a structural tool used to bridge valuation gaps and derisk bank financing. When a buyer asks for a seller note, they are either hitting leverage limits with senior lenders or testing your confidence in the business. If you reject it outright, you often force the buyer to lower their headline valuation to fit their cash equity and bank debt constraints.

Agreeing to carry paper makes sense under three conditions. First, it bridges the gap between what a lender will advance and the total multiple you demand. Second, the note earns an above-market interest rate, usually between eight and twelve percent, turning part of your exit into a high-yield fixed income stream. Third, you have verified that the post-close debt service coverage ratio leaves enough breathing room so the business does not default under standard operational swings.

To protect your position, you must treat yourself like a junior commercial lender. Never accept an unsecured seller note. Require a personal guarantee from the buyer if they are an individual, or an operating pledge over the company equity if they are an independent sponsor. Demand monthly or quarterly financial covenant reporting so you can spot deterioration early.

Most importantly, address subordination language upfront. Senior lenders will demand that your note is subordinated to their bank debt, but you must negotiate for standby equity terms that allow regular interest and principal payments as long as the senior facility is not in active default. If the buyer insists on a full standstill where you receive zero payments for several years, that is not financing. That is an equity risk disguised as debt, and your headline price should adjust upward to reflect that risk.