What a seller note really asks you to accept
Deferred payment should be evaluated as a credit decision, not just purchase price.
When part of the purchase price is paid through a seller note, the seller becomes a lender to the buyer.
That can help complete a transaction. A note may bridge a financing gap, signal confidence in the business, or improve total economics. But the face amount is not cash at closing, and the seller bears repayment risk after ownership has transferred.
Evaluate the note as a credit instrument. Who is the borrower: the acquisition entity, the operating company, or a parent? What assets and cash flows support repayment? Is the note secured, guaranteed, or subordinated to senior lenders? Senior debt documents may restrict interest payments, principal payments, remedies, and amendments.
Review the economics beyond the interest rate. Important terms include amortization, maturity, any balloon payment, prepayment rights, default interest, financial covenants, reporting, and acceleration events. If the buyer can add debt, pay distributions, or move assets without restriction, the seller’s position may weaken over time.
Remedies must also be practical. A security interest has limited value if senior creditors have priority over all meaningful assets. A right to accelerate does not create liquidity if the borrower cannot pay.
The comparison is therefore not simply “$5 million now or $6 million later.” It is the present, risk-adjusted value of the note and the protections available if performance deteriorates.