How much seller financing is typical when buying a business?

What decides the size of the note

There is no standard share of the price that a seller carries. The note is a plug, and its size falls out of three other numbers: the price, the most a senior lender will lend against the business, and the cash the buyer brings. When the senior loan and the buyer's equity cover the price, the seller note can be small or absent. When the lender sizes below the price, because the earnings support less debt than the seller hoped, the seller is asked to carry the difference or to lower the price.

That is why, in deals financed by a bank or an SBA lender, the seller note is almost always a minority of the price and well below the senior loan. The senior lender supplies most of the money. The note fills a gap at the top of the stack, and the lender will only let it be as large as the business can carry alongside the senior debt. In deals without a senior lender, where the seller finances most of the price, the note can be much larger; that is a different trade, compared on seller financing vs bank financing.

On an SBA purchase, one number anchors the discussion. SBA requires an equity injection of at least 10% of total project costs for a complete change of ownership, and a seller note on full standby can count for up to half of it. A standby note sized to exactly half the injection is common for that reason, but nothing stops a larger note. The amount above that half is simply debt, not equity. The rules are set out in seller notes and SBA's full-standby rule and how much equity you need to buy a business.

Rate, term and amortization

Seller notes are negotiated, not priced off a market, so their terms vary more than bank loans do. The patterns lenders see most often:

• Rate. Negotiated, and it varies widely. Junior risk argues for a rate above the senior loan's, but many sellers who want the deal done, or who are keen to see the business continue, accept less than the senior lender charges.
• Term. A paying note usually runs shorter than the senior loan. That makes its annual payment larger than its size suggests, which is where coverage problems start.
• Amortization. Level payments, interest-only for a period followed by amortization, or a single payment at maturity. Each has a very different effect on the first years' cash flow.
• Maturity against the senior loan. A standby note under SBA cannot be paid while the SBA loan is outstanding, so it matures after it. Conventional lenders often want the note to mature after their loan as well.
• Security and guarantee. The seller may take a junior lien and the buyer's personal guarantee, subject to the senior lender's approval and ranking behind it.

Outside SBA, the terms that most concern a conventional lender are covered in seller note terms in conventional deals.

Why lenders like to see one

A seller who agrees to be paid later, and behind the bank, is saying something the financial statements cannot: that they expect the business to keep producing cash after they leave. Lenders read a seller note as that signal. It matters most where the business depends on the seller's relationships, where earnings have recently improved, or where the buyer is new to the industry. It also gives the buyer recourse: a note with offset rights can be reduced if the seller's representations in the purchase agreement turn out to be wrong.

The reverse is also read. A seller who insists on every dollar in cash at closing does not disqualify a deal, but lenders notice it and ask why. A seller who wants contingent payment instead is proposing an earnout, which SBA prohibits in a change of ownership it finances; the difference between the two instruments is on earnout vs seller note.

The real question: how the note sits behind the senior debt

Two notes of the same size can make a deal work or break it, depending on how they are written. What a senior lender looks at is whether the note can take cash out of the business while the senior loan is outstanding, and what happens if the business struggles.

The conventional column is the one sellers most often misunderstand. A senior lender will usually let a seller note be paid, but only under a subordination agreement that stops payments if the borrower misses a covenant and bars the seller from suing or taking collateral for a standstill period. Those terms are covered in seller note subordination terms. A seller who first sees them at closing can refuse to sign, and the deal stalls.

Agree the note's subordination terms in the letter of intent. A note whose terms the senior lender will not accept has to be renegotiated, and that happens at the worst moment.

A worked example: same debt, different result

An SBA purchase with total project costs of 3,000. The minimum injection is 300. The buyer brings 150 in cash, and a seller note on full standby supplies the other 150. The business produces 500 a year of cash flow available for debt service. From 1 October 2026, a change of ownership must show 1.25x on historical results under SBA's rules, and banks commonly look for at least 1.25x anyway, so payments must stay at or below 400.

In the second row the seller carries more of the price and the SBA loan shrinks, yet the deal fails coverage, because the paying note is repaid much faster than the SBA loan it replaced. The third row carries exactly the same debt and passes easily. Only 150 of the standby notes count toward the injection; the rest is debt that waits. Nothing changed but the terms. How coverage is calculated is on debt service coverage ratio.

Conventional deals work the same way with different limits. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and the seller note sits between that loan and the buyer's equity. A note with a long interest-only period and a maturity after the senior loan can fill a large gap without denting coverage. The same amount on a short amortizing schedule can use up the headroom the senior lender needed.

Negotiating the note

• Start from the lender's number. The senior loan the business supports fixes the gap. Sizing the note before knowing it is guessing.
• Trade rate for patience. A seller asked to wait behind the lender, or on full standby, is usually compensated through the rate or accrued interest, not through earlier payments.
• Put the subordination in writing early. Standby for SBA deals; payment blockage and standstill terms for conventional ones.
• Keep offset rights. The right to reduce the note for breaches of the seller's representations protects the buyer without a separate escrow.
• Plan the payout. Some seller notes are paid off early when the senior loan is later refinanced; see refinancing a seller note.

Transparent's financing model shows coverage with and without each seller note's payments, so the size and terms of the note are settled against the lender's test before a lender reads the file. What the model contains is on the package. For alternatives to a seller note in the same slot, see rollover equity vs seller note and mezzanine vs seller note.