Seller’s Notes in M&A: The Good, The Bad, and The Ugly

In mergers and acquisitions, few deal terms spark as much debate as the seller’s note. For some, it’s a clever way to bridge valuation gaps. For others, it’s a risky handshake that can sour after closing. Like many financing tools, seller’s notes come with advantages, drawbacks, and cautionary tales. Here’s a breakdown of the good, the bad, and the ugly when it comes to using them in M&A deals.

What Is a Seller’s Note?

A seller’s note is a form of deferred payment financing where the seller “loans” the buyer part of the purchase price instead of receiving the full amount in cash at closing. It’s usually structured as a subordinated note, meaning it sits behind senior debt in priority of repayment.

Example: If a business sells for $20 million, and the buyer can secure only $15 million upfront (through cash and bank financing), the seller may agree to carry a $5 million seller’s note, payable over time with interest.

The Good

Deal Maker, Not Breaker: When buyers struggle to raise all the capital, a seller’s note keeps deals alive by filling the financing gap.

Higher Valuation Support: Sellers may achieve a headline purchase price that otherwise wouldn’t be possible if the buyer were restricted by available bank loans or equity.

Attractive Returns: With interest rates often higher than senior debt, sellers can earn a steady income stream beyond the sale price.

Alignment of Interests: A seller who’s financing part of the deal has a vested interest in the company’s post-sale success, creating a smoother transition and cooperation period.

The Bad

Subordination Risk: Seller’s notes usually rank below bank debt, meaning if the company struggles, banks get paid first and the seller may recover little or nothing.

Delayed Liquidity: Unlike cash at closing, sellers wait years to receive the full value of their business, potentially tying up wealth they expected immediately.

Uncertain Future: If the buyer mismanages the business, the seller’s repayment is at risk—no matter how solid the company once was.

Opportunity Cost: Funds tied up in a seller’s note can’t be immediately reinvested elsewhere, limiting flexibility for the seller.

The Ugly

Default Nightmares: In downturns or poorly managed acquisitions, seller’s notes are often the first casualty when cash flow runs thin.

Strained Relationships: Disputes may arise if sellers feel the buyer isn’t prioritizing repayment obligations or if payment terms stretch longer than expected.

False Sense of Security: Some sellers assume a note guarantees eventual payment, overlooking the fact that these notes, especially unsecured ones, can be little more than paper promises.

Buyer Overreach: Sometimes buyers lean too heavily on seller financing, using it as a crutch for undercapitalized deals. This increases the chances of default and ultimately burns both sides.

Final Thoughts

A seller’s note can be a useful tool to unlock deals that might otherwise collapse in negotiation. For the right buyer-seller relationship, it can provide mutual benefits—higher valuation for sellers, manageable financing for buyers. But when poorly structured or over-relied upon, seller’s notes morph into ticking time bombs that jeopardize both payment certainty and post-deal relationships.

In the end, the decision boils down to risk tolerance: Is the seller willing to stay financially tied to the company’s future—or is walking away with cash king?