Seller financing (a "seller note," "vendor financing," or "seller carryback") is an arrangement in which the seller lends the buyer a portion of the purchase price, which the buyer repays over time with interest. Instead of receiving all cash at closing, the seller takes back a promissory note for part of the price — effectively becoming a lender to the buyer of their own business.
How it works
At closing, the buyer pays most of the price (from equity and senior debt) and signs a note to the seller for the balance — commonly 10–30% of the purchase price — repaid over several years at a negotiated interest rate. The note is almost always subordinated to the buyer's senior bank or institutional debt, meaning the senior lender gets paid first if there is trouble; the seller's note ranks behind it.
Why it is used
Seller financing solves several problems at once, which is why it is a staple of lower-middle-market and "main street" deals:
- Bridges the financing gap. It fills the space between the buyer's available cash/equity and what a bank will lend, making deals possible that would otherwise fall short.
- Signals seller confidence. A seller willing to leave money in the deal — and get repaid only if the business keeps performing — sends a powerful message that they believe in the company's future. Buyers (and lenders) read a seller note as a vote of confidence; a seller's refusal to finance any portion can itself be a red flag.
- Bridges valuation gaps. Like an earnout, a seller note can help the parties meet in the middle on price while spreading the buyer's risk.
- Enables SBA deals. SBA 7(a) lenders frequently require a seller note, and a note placed on full standby (no payments for a period) can count toward the buyer's required equity injection.
Risk and terms
For the seller, the note is the riskiest slice of the proceeds — it is unsecured or junior, paid over years, and can be impaired if the business (now run by someone else) falters. Sellers mitigate this with personal guarantees, security interests where permitted, interest that compensates for the risk and time, and acceleration/default provisions. For the buyer, the note is attractive financing: often cheaper and more flexible than bank debt, with a counterparty (the former owner) who is motivated to see a smooth transition.
Where it fits
Seller financing is typically one component of mixed consideration, sitting alongside cash, an earnout and sometimes rollover equity. It is most prevalent in smaller, privately negotiated deals — ETA and search-fund acquisitions, family-business sales and broker-led transactions — where institutional financing is limited and the seller's continued goodwill matters.
See also
- Mixed consideration — A deal that pays sellers with a combination of cash, stock, earnouts, seller notes and rollover equity — by far the most common shape of modern private deals.
- SBA acquisition financing — U.S. Small Business Administration-guaranteed loans, particularly the SBA 7(a) program, used to finance acquisitions of small businesses up to roughly $5M in total project size.
- Earnout — Deferred, contingent payments tied to the target’s post-close performance, used to bridge buyer–seller valuation gaps but a frequent source of post-closing dispute.
- Entrepreneurship through acquisition — The category of transactions in which an individual entrepreneur acquires an existing operating business — most commonly via a search fund, self-funded search or SBA-financed deal.
- Search fund — An entrepreneurial vehicle in which one or two operators raise modest investor capital to search for, acquire and operate a single small or lower-mid-market company.
- Mezzanine debt — Subordinated debt with equity features such as warrants or PIK interest. Sits between senior debt and equity in the capital structure, with correspondingly higher cost.
External resources
Practitioner guides from Main Street Wealth, the M&A advisory firm that sponsors M&Apedia (how this works):
- Sell a business — Sell-side advisory process, timelines and seller resources.