The seller-note deserves dedicated treatment because the mechanics matter beyond the headline "20% of price as seller-note" summary. Note terms, interest pricing, security and subordination, default mechanics, and tax-treatment together determine both sides' actual economic outcomes. The discipline is in the details.
Principal, interest, amortization.
Standard seller-note terms for agency M&A.
- Principal. Typically 10–30% of headline price. The proportion reflects valuation-gap bridging, senior-debt-capacity constraints, and the seller's appetite for continued exposure.
- Interest rate. Typically 6–10% depending on senior-debt rates and the note's subordination position. Sometimes uses a floating-rate benchmark (SOFR + spread) for longer-duration notes.
- Amortization. Typically 5–7 year fully-amortizing schedules. Some notes use 5-year terms with balloon payments, where the borrower refinances or pays the balloon from operating cash flow.
- Prepayment terms. Whether the buyer can prepay without penalty. Most agency seller-notes allow prepayment; some include yield-maintenance provisions that compensate the seller for lost interest on early payment.
Above senior, below mezzanine.
Seller-note interest pricing sits structurally between senior debt (typically 6–8% in agency M&A) and mezzanine-style financing (12–18% if it exists in the deal). The seller-note's price reflects its subordinated, unsecured nature.
The floor reference.
- Bank rates 6–8% typically.
- Specialty lender rates 7–10%.
- First-lien secured.
- Seller-note pricing must exceed this baseline.
Negotiated band.
- 6–10% typical.
- Reflects subordinated, often unsecured nature.
- Sometimes float-rate (SOFR + spread).
- Personal-guarantee provisions matter.
Upper bound.
- Mezzanine financing 12–18% in this market.
- Seller-notes typically below this band.
- Sellers who want mezzanine rates often demand structural changes (warrants, conversion features).
Where the note sits in the stack.
Subordination to senior debt is the universal feature of seller-notes in agency M&A. Senior lenders require subordination as a condition of financing; the seller-note proceeds are second-position capital.
- Subordination agreement. Separate document executed by buyer, senior lender, and seller. Defines the priority order, payment blockage during senior-debt defaults, and the seller's enforcement rights.
- Standstill provisions. The seller-note holder agrees not to enforce against the buyer or accelerate the note during senior-debt defaults. Standstill periods typically 90–180 days.
- Personal guarantees. Sometimes the buyer's principals personally guarantee the seller-note. Common in smaller-deal seller-notes; less common at larger scale.
- Collateral. Most seller-notes are unsecured at the entity level (the senior debt has first-lien on entity assets). Some seller-notes are secured by specific second-position pledges on the acquired-agency stock or assets.
What happens when payment misses.
Default mechanics define the seller's recourse if the buyer misses payments. Three components.
- Payment default cure period. Typically 5–15 business days. The buyer has the cure period to pay missed amounts before formal default is triggered.
- Cross-default with senior debt. Senior-debt default typically triggers seller-note acceleration (subject to subordination standstill). The seller is not collecting during senior-debt default but the position is preserved.
- Acceleration. On non-cured default, the full note balance becomes immediately due. In practice, the seller's remedies are limited by subordination — the seller can demand acceleration but can't enforce against the buyer until senior debt is satisfied.
Installment-sale rules, deferred gain.
Seller-note structure typically qualifies for installment-sale tax treatment under Section 453. The seller recognizes gain on the note proceeds as they're paid, rather than at close — deferring tax liability across the note's payment schedule.
The tax benefit:
- Deferred gain recognition. Each payment carries a portion of principal (return of basis), a portion of recognized gain, and the interest component. The gain portion is taxed in the year received; the deferral can extend over 5–7 years.
- Rate sensitivity. If the seller anticipates being in a lower tax bracket in future years, the deferral has rate-arbitrage value.
- Interest income. The interest portion is ordinary income each year. The gain portion (depending on character) is typically capital gain.
- Limitations. Specific Section 453 limitations apply (large-deal installment-sale interest charge, related-party rules, depreciation-recapture treatment). Seller's tax counsel should review.
Seller financing is the structural-detail layer below payment-structure types. Both layers ground in the economic-foundations layer that establishes the deal's pricing and capital structure. The Pillar — Payment Structures — covers the broader framework.