Seller financing — also called owner carry, owner carry-back, seller carry, or seller note — is when the seller agrees to finance a portion of the purchase price through a promissory note rather than receiving all cash at closing. The seller essentially acts as a lender, accepting an IOU that documents repayment terms.

This structure signals the seller's confidence that the business will continue performing post-sale. When sellers are willing to carry paper equal to a bank's position, it demonstrates genuine belief in ongoing performance. The promissory note is a legal document that outlines the repayment schedule, interest rate (if any), and other terms.

Seller financing bridges the gap when buyers can't secure full bank financing or want to preserve cash for operations. It's particularly common in lower middle market deals where traditional lending may be limited.

Seller financing typically ranges from 10-30% of the purchase price, though experienced acquirers often start negotiations at much higher levels. A seasoned M&A practitioner's default template begins with 80% seller financing and 20% down payment as the initial offer framework.

In documented examples, a $1 million deal might include $200,000 (20%) in seller financing, while roll-up acquisitions at Mango Automotive use 90% seller financing with only 10% down. On a $797,000 acquisition using the 80/20 structure, this produces approximately $637,600 in seller-financed debt and a $159,400 down payment.

The percentage varies based on deal size, industry, and market conditions. Larger deals typically have lower seller financing percentages, while smaller deals may require higher seller carry due to limited traditional financing options.

Seller financing terms have three key variables: term length (commonly 3-10 years), interest rate (negotiate for zero first), and amortization structure. The most favorable structure for buyers starts with zero percent interest, no monthly payments, and a single balloon payment at the end of the agreed period.

A documented hierarchy shows six positions from most to least favorable for buyers: (1) unsecured note with no interest and balloon payment, (2) unsecured with no interest but amortized payments, (3) unsecured with interest and balloon, (4) unsecured with interest and amortized payments, (5) secured with no interest and balloon, (6) secured with interest and amortized payments.

Roll-up acquisitions typically use 8-12 year terms (usually 10 years), while standalone deals often range 3-7 years. Even when bank deposits earn 4.75-5% interest, motivated sellers still accept zero-interest structures.

Start with the most buyer-favorable terms and concede ground only when required — never volunteer concessions the seller hasn't requested. Begin with zero interest, no monthly payments, and an unsecured balloon payment. Add interest first if needed, then monthly payments, then security.

A three-option approach borrowed from real estate helps identify what sellers value: Option 1 offers all cash at a discount (full valuation minus broker fees), Option 2 provides balanced terms with 30-40% seller financing, and Option 3 offers premium pricing with maximum seller financing (20% down, seller carries remainder).

Key negotiation psychology focuses on what retiring sellers actually need. Most don't need large lump sums but rather steady retirement income of $10,000-$15,000 monthly, which seller financing naturally provides. This insight helps structure deals that meet seller needs while preserving buyer cash flow.

Seller financing creates counterparty risk — the buyer owes money to the seller over time, and default can trigger personal guarantees or asset seizure. Unlike bank debt that's arm's length, seller notes create ongoing relationships with former owners who may have different priorities post-sale.

Subordination is universal but creates complexity. Seller notes sit behind senior lenders in priority, meaning banks get paid first from collateral and cash flow. Sellers sometimes perceive this as unfair, requiring explanation that senior lenders provide majority capital and assume primary risk.

Cash flow pressure intensifies when seller payments are due during difficult periods. Unlike banks that may restructure loans, sellers may be less flexible about payment modifications. Additionally, if the business underperforms, both senior debt and seller obligations must still be serviced, potentially forcing difficult decisions about operations versus debt payments.

Sellers face collection risk if buyers default on payments, especially with unsecured notes that lack collateral protection. Unlike receiving cash at closing, seller financing creates ongoing exposure to business performance and buyer management decisions.

Time value of money reduces effective purchase price. A $1 million deal with $500K upfront and $100K annually for five years may be worth less than a $900K all-cash offer due to present value calculations and risk factors. Sellers must also consider inflation impact on future payments.

Lack of control compounds risk since sellers no longer operate the business but depend on new management for payment. If buyers make poor decisions or the market changes, seller note payments may become jeopardized. Additionally, subordinated seller notes rank behind senior lenders, meaning sellers get paid last if the business experiences distress.

Variable deal terms significantly modify effective value beyond headline purchase price. Seller financing typically reduces net present value compared to all-cash offers due to time value of money and counterparty risk considerations.

Creative structures can actually increase total purchase price while reducing buyer cash requirements. A documented HVAC deal offered 50% above business valuation with zero down, where the seller receives 25% of EBITDA above baseline until total price is satisfied. This benefits both parties — higher total price for sellers, preserved cash flow for buyers.

Earnouts and performance payments often accompany seller financing when future value is uncertain. If sellers project specific growth metrics, earnouts bridge valuation gaps by making sellers put conviction at risk. Terms drive deals more than headline price, with structure determining how risk is allocated between parties.

Use seller financing when traditional bank loans are unavailable, insufficient, or too restrictive. SaaS businesses under $500K often can't access bank loans, making revenue-based funding plus seller financing necessary. Seller financing also preserves cash for operations and growth rather than depleting working capital at closing.

Bank loans typically require personal guarantees, extensive documentation, and fixed payment schedules regardless of business performance. Seller financing offers more flexibility in structuring terms around business cash flow and growth projections.

A three-tier escalation approach starts with 100% seller financing (lowest buyer risk), moves to hybrid structures using alternative financing for down payments, then falls back to traditional bank financing. Always start with seller financing and see if it works before adding complexity and third-party lenders.