Seller Financing Explained: Why Most Lower-Middle-Market Deals Include It
- Cameron DuPree
- Aug 10
- 2 min read
Most owners want all cash at closing. Most deals in the lower middle market do not work that way, and understanding why puts you in a much stronger position when the subject comes up.
Why buyers ask for seller financing
A seller note does three things for a buyer: it reduces the cash they need at closing, it fills a gap when a lender will not finance the full purchase price, and it keeps the seller economically invested in a clean transition. That third reason is the one buyers say out loud, and it is not unreasonable. A seller who carries paper has a continuing incentive for the business to succeed after closing.
On SBA-financed transactions, seller notes are often structurally required. Lenders frequently want the seller to carry a portion of the price, sometimes on full standby, meaning no payments until the bank loan is satisfied or a defined period passes.
What normal terms look like
In lower-middle-market transactions, seller notes commonly cover somewhere between ten and thirty percent of the purchase price, amortized over three to seven years, at interest rates that track prevailing commercial lending rates. Longer terms and lower rates favor the buyer; shorter terms and higher rates favor you.
The terms that matter as much as rate and length: whether payments begin immediately or after a standby period, whether the note is secured, whether there is a personal guarantee from the buyer, and what happens on default.
How to protect yourself
A seller note should always be papered properly with three documents: the promissory note itself, a security agreement giving you a lien on the business assets, and a personal guarantee from the buyer individually. Without the security agreement, you are an unsecured creditor if things go badly. Without the guarantee, you are relying on an entity that may have no assets other than the business you just sold.
Watch for subordination. On SBA deals, your note will almost certainly sit behind the bank's loan, which means the bank gets paid first if the business struggles. That is standard and usually unavoidable, but you should understand it going in rather than discovering it at closing.
Should you carry paper?
A seller note is not a concession, it is a pricing tool. Sellers who refuse financing entirely often net less than sellers who carry a reasonable note, because the buyer pool shrinks and the cash-only buyers who remain expect a discount for their certainty.
The question is not whether to carry a note, it is whether this specific buyer is creditworthy, whether the terms are fair, and whether the business generates enough cash flow to service both the bank debt and your note comfortably. A well-structured note to a qualified buyer is one of the most common paths to a full-value exit at this size.
Comments