Seller Financing Explained: When It Helps and When It Hurts
When founders imagine selling their business, they typically picture receiving a wire transfer for the full purchase price at closing. The reality is more complex. Most transactions, especially in the lower mid-market, include some form of seller financing where the seller agrees to defer receipt of a portion of the purchase price.
Seller financing takes various forms: promissory notes, earnouts, and deferred payment arrangements. In each case, the seller is effectively lending money to the buyer, secured by the business the seller just sold. This arrangement creates both opportunity and risk. Understanding when seller financing helps close deals at better terms versus when it inappropriately shifts risk back to the seller is essential for any founder entering a transaction.
The data shows how pervasive this financing structure has become, and the patterns reveal which buyers and industries rely on it most heavily.
The Reality: 80 Per Cent of Small Deals Include Seller Financing
The all-cash exit is largely a myth at smaller transaction sizes. According to Morgan and Westfield analysis, 80 per cent of small business sales include some form of seller financing. Less than 10 per cent of businesses sell for all cash.
These numbers may surprise founders who assume that finding the right buyer will produce clean economics. The reality is that buyers at most price points face financing constraints. Bank lending for acquisitions is limited, particularly for smaller transactions where the fixed costs of underwriting exceed lender appetite. Private equity firms leverage their investments to enhance returns, but that leverage often needs to be supplemented with other capital sources. Strategic acquirers may have the resources for all-cash deals but often prefer structured payments that align seller incentives with post-closing performance.
The prevalence of seller financing is not a market dysfunction. It is a rational response to information asymmetry. Buyers know less about the business than sellers. Seller financing signals that the seller believes the business will continue performing well enough to support the payments. Without that signal, many buyers would offer less or walk away entirely.
Understanding this context helps founders approach seller financing requests more productively. The question is not whether to accept some seller financing but how much, on what terms, and with what protections.
Why Buyers Ask for Seller Notes
Buyers request seller financing for several legitimate reasons, each with different implications for sellers.
Financing constraints are the most straightforward explanation. A buyer may have conviction about the business and a strong plan for growth but lack the capital to fund the entire purchase price. Seller financing fills the gap, enabling a transaction that would otherwise not close. For sellers, this is often preferable to accepting a lower all-cash offer from a different buyer.
Valuation bridging serves both parties when there is genuine disagreement about the business's prospects. If the seller believes the business is worth $20 million and the buyer believes $16 million is fair, a seller note for $4 million, payable over time with interest, can bridge the gap. The seller gets their price if the business performs. The buyer limits downside if it does not. Both parties can proceed with a transaction that would otherwise fail.
Transition alignment keeps sellers engaged post-closing. When a portion of proceeds depends on future performance, sellers have incentive to support the transition, make introductions, and transfer knowledge effectively. Buyers value this alignment, particularly when the business depends on relationships or expertise that live in the founder's head.
Risk mitigation protects buyers from undisclosed issues. Seller notes often sit behind senior debt and can be offset against indemnification claims. If problems emerge after closing, the buyer has recourse without pursuing litigation. This protection makes buyers more willing to proceed at higher valuations than they might otherwise accept.
The Numbers by Buyer Type
Not all buyers rely on seller financing equally. Analysis of 100 letters of intent by Axial reveals significant variation by buyer type.
Family offices request the highest median seller note at 18.18 per cent of deal value. These buyers often have significant capital but prefer to preserve liquidity across multiple investments. They may also value the transition alignment that seller notes provide, particularly for businesses where founder relationships drive value.
Independent sponsors and search funds both show median seller notes of 16.67 per cent. These buyers typically raise deal-by-deal financing and rely on seller notes to complete their capital structures. Founders selling to these buyers should expect seller financing as a standard component of the transaction.
Private equity firms request median seller notes of 13.59 per cent. PE buyers have more financing options than independent sponsors but still use seller notes to enhance returns and create transition alignment.
Holding companies come in at 12.88 per cent, individual investors at 11.86 per cent, and corporations at 11.76 per cent. Corporate strategic buyers have the lowest reliance on seller financing because they typically have balance sheet capacity to fund acquisitions directly.
These benchmarks help founders evaluate requests in context. A family office asking for 20 per cent seller financing is within market norms. A corporate strategic asking for the same may be overreaching relative to their typical practice.
The Numbers by Industry
Industry sector also affects seller financing expectations. The same Axial analysis shows meaningful variation.
Technology transactions show the highest median seller note at 21 per cent of deal value. This may reflect the complexity of technology businesses, where buyer confidence in future performance depends heavily on factors that are difficult to verify during diligence. Seller financing provides protection against the risk that technology assets, customer relationships, or competitive dynamics prove different from expectations.
Transportation follows at 19.09 per cent, reflecting an industry where asset values and customer contracts drive outcomes that can change quickly.
Consumer goods transactions show median seller notes of 16.67 per cent, industrials at 15 per cent, and business services at 12.5 per cent. Healthcare transactions show the lowest median at 11.68 per cent, perhaps reflecting the regulated nature of the industry where extensive diligence provides more buyer confidence.
Founders in technology should expect seller financing as part of most transactions. Those in healthcare or business services may have more negotiating room to reduce or eliminate it.
Protecting Yourself When Agreeing
When seller financing makes sense for the transaction, founders should negotiate terms that protect their interests. Several elements deserve attention.
Standard market terms provide useful benchmarks. The average length of seller notes is five years, though terms vary from three to seven years. Shorter terms reduce seller risk but may strain buyer cash flow. Longer terms extend the period during which proceeds remain at risk. The average interest rate ranges from 6 to 8 per cent, reflecting the subordinated position of seller notes relative to senior debt.
Security interests protect sellers against buyer default. A seller note secured by the assets of the business, even if subordinated to senior lender interests, provides recourse if the buyer fails to pay. Unsecured notes leave sellers with only a general claim against the buyer, which may be worthless if the business fails.
Subordination terms determine the seller's position relative to other creditors. Senior lenders typically require that seller notes be subordinated, meaning they get paid first if problems arise. Founders should understand exactly what subordination means for their note and negotiate limitations on additional debt that could further dilute their position.
Acceleration and default provisions specify what happens if the buyer breaches the note terms or the business fails to meet certain thresholds. Clear triggers and remedies protect sellers from situations where the buyer stops paying without consequence.
Personal guarantees from buyer principals provide additional security beyond the business assets. If the buyer is a newly formed acquisition vehicle with limited assets, a guarantee from individuals with resources provides meaningful protection.
When to Walk Away
Not every seller financing request deserves acceptance. Several patterns suggest a transaction may not be worth pursuing.
Excessive seller financing relative to market norms suggests that the buyer cannot obtain adequate financing from other sources. If the buyer is asking for 40 per cent seller financing when market norms are 15 per cent, something is wrong. Either the buyer lacks credibility with lenders, or they are attempting to shift disproportionate risk to the seller.
Poor terms on the seller note suggest the buyer does not value the seller's participation. A below-market interest rate, minimal security, or aggressive subordination terms all indicate that the buyer expects to benefit from seller financing without fairly compensating the risk.
Buyer unwillingness to provide personal guarantees may indicate limited confidence in the deal. If the buyer's principals are not willing to stand behind the note personally, they may not believe the business will generate sufficient cash flow to service it.
Earnout-heavy structures that shift most consideration to performance-based payments are seller financing by another name. When the majority of purchase price depends on future performance that the seller no longer controls, the risk profile is very different from a cash transaction.
Founders should evaluate the complete economics of any transaction, including the realistic value of deferred components. A $50 million headline price with $20 million in seller notes is not the same as $50 million cash. The appropriate discount depends on the terms, the buyer's creditworthiness, and the business's prospects under new ownership.
If you are evaluating a transaction that includes seller financing and want to understand whether the terms are reasonable, we would be happy to discuss what market practice looks like and how to negotiate effectively.