Part of the price left as a loan from the seller to the buyer, repaid over time with interest. The seller is effectively financing part of their own exit and ranks behind the banks if things go wrong.
Why it matters
A seller note turns part of the purchase price into a loan the seller makes to the buyer,
repaid over an agreed period with interest. It shows up when a buyer cannot or will not pay the
full price in cash at closing, and it lets the deal happen anyway — at the cost of the seller
carrying credit risk on the very company they just sold.
For a founder, a seller note is a bet on the buyer's ability to run the business well enough to
pay it back. That is a different kind of exposure than an earnout, where the
payment depends on the target company's own performance: a seller note depends on the buyer's
broader financial health, which the seller usually has far less visibility into after closing.
How it works
The note specifies the amount, the interest rate, the repayment schedule and what happens on
default — the same terms any loan agreement would carry. What decides how much protection it
actually offers is where it sits relative to the buyer's other debt: a seller note is typically
subordinated, meaning banks and other senior lenders get paid first if the buyer runs into
trouble, and the seller queues behind them.
Because of that subordination, sellers who agree to a note usually negotiate for security over
specific assets, covenants limiting how much additional debt the buyer can take on, or
acceleration clauses that make the whole balance due immediately if the buyer misses a payment or
breaches a covenant.
A seller note also changes the shape of the tax outcome, since payments are received over
several years rather than in one lump sum at closing — a detail worth discussing with an adviser
rather than assuming works one way or the other.
Questions people ask
- What is a seller note in an acquisition?
- It is a loan the seller extends to the buyer for part of the purchase price, repaid over time with interest instead of being paid in cash at closing. It lets a deal proceed when the buyer cannot fund the whole price upfront, with the seller taking on the role of a lender.
- Is a seller note riskier than an earnout?
- It carries a different risk. An earnout depends on how well the sold business performs, which the seller can often still influence or at least observe. A seller note depends on the buyer’s overall financial health and ability to repay, which the seller typically has much less visibility into once the deal has closed.
- What happens to a seller note if the buyer goes bankrupt?
- A seller note is usually subordinated to senior lenders such as banks, meaning those lenders are repaid first. If the buyer becomes insolvent, the seller often recovers little or nothing on the note unless it negotiated security or priority terms in advance.
See also
More in Deal structure
- Asset purchase — The buyer acquires chosen assets — code, customers, brand, sometimes staff — rather than the company.
- Cap table — The register of who owns what: shares, options, convertibles and the terms attached to each.
- Earnout — Part of the price paid later, only if the business hits agreed targets.
- Escrow — Part of the price held by a neutral third party for an agreed period, available to the buyer if the seller’s promises turn out to be wrong.
- Liquidation preference — The right of certain investors to be paid before ordinary shareholders when the company is sold.
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Updated 2026-09-09