Seller Carry Note

Comments About This Glossary Term

Seller Carry Note, In some cases the Seller of a business will carry a note back from the Buyer (Carry Back Note). This is desirable in many cases, to the Seller who might find it easier to sell the business and possibly have some tax benefits as well. Many Sellers, especially those going into semi retirement enjoy the monthly income. The Buyer will often prefer it to traditional financing, as it eases the burden, costs and delays sometimes associated with financing, and also offers some level of peace of mind knowing that the Seller has confidence that the business will perform sufficiently to repay the debt. Another benefit is the ability to customize the terms. As a for instance, if the business is highly seasonal or subject to climate changes (like ski businesses), special considerations can be made that may assist the new owner in particularly difficult times.


When a Seller finances a portion of the purchase price of a business, the loan is known as a Seller Carry Note. The Seller agrees to "carry back" a portion of the purchase price, and the buyer promises to pay that amount back over time. Seller Carry Notes have become increasingly popular as bank and SBA-guaranteed financing has been more difficult for Buyers to obtain.

From the Seller's perspective, offering to carry back a portion of the purchase price will open up the market for the business to a wider range of potential buyers. From the Buyer's perspective, the availability of a Seller Carry Note gives some assurance that the Seller believes in the ongoing potential of the business, and may allow them to purchase a business they would otherwise not have been able to finance on their own. Interest rates can vary depending on market conditions and the willingness of the parties to negotiate in order to close a transaction. While they may be somewhat higher than traditional bank loans a smart Seller will set interest a level reasonable enough that a Buyer will not be forced into default.

There are a number of steps Sellers can take to ensure that their notes are as secure as possible and that they will be able to collect in the event a Buyer defaults. These include ensuring that the note is secured by both the assets of the business and personally guaranteed by the Buyer, drafting a separate security agreement which gives the Seller a broad range of powers including the right to inspect financial records and power of attorney with regards to specific transactions in the event of default, and filing a UCC-1 Financing Statement with the appropriate governmental agencies immediately after completing the transaction. Those steps will also make the note more salable to a third party in the future if the Seller ever wants to sell the note for a lump sum.

Often, in order to reach the agreed purchase price, the seller of a business needs to "hold paper." This means in essence the seller "takes back a mortgage." For example, assume a purchase price of $200,000: the buyer puts $80,000 cash into the deal (40%), gets an SBA loan of another $80,000 (40%), and agrees to pay the seller $40,000 (20%) over time. The seller "carries a note" for that amount. Such a note can be structured any way the parties choose: regular monthly payments of principal and interest; interest only, with a bulk payment in a year, or two, or three; payment after the happening of certain events, etc. Generally, the Seller Carry Note is guaranteed by a lien on the business assets and on other personal assets of the buyer (such as a second lien on a home) and by the personal guarantee of the buyer.

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.