A seller note is a loan you make to the person buying your business, repaid out of the business you no longer control. It bridges a gap between the price you want and the cash the buyer can raise, and it is common enough at the smaller end that many sales cannot be done without one.
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The terms of a seller's note that matter
The principal, the interest rate, the term, whether there is a period of interest only payments at the start, and whether the note is secured. Security is the difference between a promise and a claim: a note secured on the assets of the business, with a personal guarantee from the buyer, is a different instrument from an unsecured promise to pay.
Where you rank
If the buyer also borrowed from a bank, the bank will usually require your note to be subordinated, meaning they are paid first and you may be barred from enforcing while their loan is outstanding. Read the subordination agreement carefully. It is where a seller note quietly becomes much riskier than it looked.
Reducing the risk
Ask for a meaningful cash deposit at closing, a personal guarantee, security over the assets, and a right to step back in or to be informed if covenants are breached. Then price the note: a seller note is finance, and finance carries interest. Accepting a low rate is a discount on the price by another name.
Questions people ask about seller note
How much of the price is usually a seller note?
It varies widely with the size of the deal and the buyer's funding. What matters more is the cash at closing, the security and where you rank against any bank.
What if the buyer defaults?
Your remedy is whatever the note and any security give you, subject to any subordination. Recovering a business that has been run badly for two years is rarely a good outcome, which is why the buyer's competence is part of your diligence.
Is interest on a seller note taxable?
Interest and principal are treated differently, and installment sales have their own tax rules. This is a question for your accountant before the structure is agreed, not after.