Seller Note
Search Funds & Self-Funded Searches
Definition
A seller note is deferred purchase-price financing provided by the seller of a business, usually repaid over time from the acquired company's cash flow.
Why it matters
Seller notes can bridge valuation and financing gaps in search-fund and small-business acquisitions, but subordination, amortization, covenants, and seller alignment matter.
Common misconceptions
- •Seller financing is not free equity; it is debt or deferred consideration with negotiated priority.
- •A large seller note can signal alignment, financing constraint, or valuation disagreement depending on context.
Technical details
Terms
Key provisions include principal amount, interest, amortization, maturity, payment-in-kind options, subordination, security, covenants, default rights, and change-of-control treatment.
Acquisition Use
Search funds use seller notes to reduce third-party leverage, retain seller confidence, and close valuation gaps when bank debt and investor equity are insufficient.