Seller Notes That Actually Close Deals: Structures Buyers and Sellers Both Accept
Standby terms, earn-outs, and interest-only seller paper — how to bridge valuation gaps in lower middle market deals without blowing up the cap stack.
Seller financing is the single most under-negotiated line in most lower middle market deals. Buyers treat it as a plug; sellers treat it as an insult. Structured well, it's the mechanism that gets the deal across the line at a price both sides can defend.
Why seller paper matters more in 2026
Bank leverage has tightened. Cash-flow multiples inside senior credit have compressed by roughly half a turn since 2024. That gap has to go somewhere — either the buyer writes a bigger equity check, the seller drops price, or seller paper fills the wedge.
Most of the time, seller paper is the cheapest answer for everyone.
Structures that work
- Standby seller note, 5-year, interest-only. Sits behind senior, pays 6–8%, balloons at maturity. Cleanest structure when senior lender requires full subordination.
- Amortizing seller note, 3–5 years, pari-passu with mezz. Higher rate (9–11%), monthly P&I. Works when there's no bank in the stack.
- Earn-out on defined revenue or EBITDA thresholds. Best when there's a real disagreement on forward performance — not as a way to hide a price cut.
- Rollover equity. Not debt, but functions similarly for cap-stack purposes. Keeps the seller aligned during transition; almost always additive to deal certainty.
What breaks seller notes
- Undefined subordination language. "Standby" means different things to different lenders. Get it in writing before signing the LOI.
- Cross-default with senior. A missed covenant on the bank line shouldn't put the seller note in default. Negotiate cure periods.
- Personal guarantees on the seller note. Rare, and usually a signal the deal shouldn't happen.
How we underwrite around it
When we place senior debt, lenders in our network treat well-structured seller paper as a credit positive — it means the seller believes in the transition. When we're advising the buyer, we push to make the seller note the largest structural piece that senior credit will accept. The cheapest capital in the stack is almost always the money that already knows the business.