A "Seller carry note" is a promissory note given to the seller of a small or mid-sized business by the buyer in lieu of cash. The note ordinarily is part of the buyer's payment for the business, making up the difference between a buyer's down payment and the business sale price. The note usually is secured by assets of the business. Sometimes parties agree the seller carry note - also referred to a "seller carry back"-- will be additionally secured by other assets the buyer owns.
The note ordinarily requires periodic payments over an agreed-on time period, sometimes as brief as few months up to several years. And it requires payment of interest on the remaining principal, usually two or more interest points below prevailing bank rates. Parties might agree that lump sum payments are to be made.
By agreeing to help finance the transaction with the note, the seller increases the likelihood of a sale at or near the price wanted. Seller financing can make it easier for a buyer to meet the price if he or she doesn't have enough cash to do so, or if some of the buyer's cash is needed for the working capital required when taking ownership of the business. And the seller's willingness to help finance with a carry note usually motivates a buyer to make the purchase and to agree to meet, or come close to meeting the seller's desired price. By taking part of the purchase price with a note, the seller demonstrates he or she is willing to have a stake in the buyer's success - what is termed "skin in the game."
Sellers who want to get more cash in a transaction than the initial down payment sometimes sell the note to an investor, usually months or years after the note was first issued. Investors insist a seller carry note be discounted when exchanged for cash. The longer the buyer has paid promptly on the obligation, in other words--the more mature the note, and therefore the more secure it is deemed to be--the smaller the amount of discount required.