Promissory notes & stock pledges — the seller-note mechanics.

A seller note looks simple — a fixed amount, a rate, a payment schedule — and is anything but. It's subordinated debt secured by a single illiquid asset, and the terms that surround the headline rate decide whether the buyer can recover a diligence miss and whether the seller can recover their money if the buyer falters. Get the offset right and the security package correct and the note works for both sides; leave them vague and the note becomes the thing the deal fights over.

§ 01 · Sizing, rate, and amortizationThe headline terms.

The headline terms are bounded by market and by tax. Principal sizes at 20–40% of purchase price for a sub-$5M agency seller note. Interest runs 5–8% fixed — and there's a floor with teeth: a rate below the published minimum applicable rate triggers imputed-interest treatment, so a below-market coupon doesn't just shortchange the seller, it creates a tax problem. Amortization runs 3–7 years, with a level-payment monthly or quarterly schedule the most common structure. Around those, the default mechanics: a 30-day cure for payment defaults, a 60-day cure for other defaults, and full acceleration on an uncured default — with a 5% late fee on missed payments and a 2%-above-contract-rate default-interest bump. These are the bones of the note; the provisions that follow are where the real risk allocation happens. The rate's place in the 2026 market is in payments over time.

§ 02 · The offset rightThe buyer's best provision.

The offset right is the provision a buyer fights hardest for, because it converts the seller note from a one-way obligation into a recovery mechanism. If a diligence miss surfaces post-close, the buyer can net the claim against the principal it still owes, rather than paying the note in full and then trying to claw money back from a seller who may have spent it. The scope is everything: it must cover indemnification claims, working-capital and purchase-price-adjustment shortfalls, post-closing covenant breaches, and restrictive-covenant liquidated damages — a narrowly scoped offset right protects far less than buyers assume. The mechanics give the seller fairness: a 15–30 day objection window after the buyer's offset notice, with the undisputed portion staying on schedule and the disputed portion withheld or escrowed pending resolution. That structure is what makes the offset right both powerful for the buyer and defensible to the seller — it's not a unilateral seizure, it's a claim with due process. The indemnification claims that flow through it are defined in indemnification caps and baskets.

§ 03 · Guarantees and securityWhat backs the note.

For an individual-buyer deal, the seller often wants a personal guarantee, and it tiers three ways: a full guarantee (the buyer personally backs the whole note — seller-favorable, rarely accepted), a limited guarantee capped at 12–24 months of payments (the market compromise), and a bad-boy guarantee (the buyer is personally liable only for fraud, voluntary bankruptcy, or unauthorized asset transfers — buyer-favorable). Underneath the guarantee sits the security that doesn't change regardless of rate: a stock pledge plus a UCC filing perfected at closing — filed in the debtor's state of organization (not where the assets sit), because a delayed or misfiled financing statement produces priority gaps that can leave the seller behind other creditors. And wherever senior debt exists, an intercreditor agreement is required, covering lien subordination, payment blockage, standstill on enforcement, and notice and cooperation between the senior lender and the seller. Security is the seller's protection, but it's also the buyer's — a properly secured note is one a sophisticated seller will accept at a fair rate, where an unsecured one invites a higher rate or a dead deal. The security floor's role across the market is in the 2026 market context.

§ 04 · Putting it togetherA note both sides will sign.

A seller note that closes cleanly balances four things. The economics have to be fair — 20–40% of price at 5–8% over 3–7 years, priced above the imputed-interest floor so neither side has a tax problem. The offset right has to be broad enough to actually protect the buyer — scoped across all four claim categories, with a fair objection window for the seller. The guarantee has to land where the parties' leverage puts it — usually the limited 12–24 month cap. And the security has to be real — a stock pledge and a UCC filing perfected at closing in the right state, with an intercreditor agreement if there's senior debt. Get those four right and the seller note does its job: it defers part of the price at a fair rate, protects the buyer against a diligence miss, and gives the seller enforceable security — a structure both sides can sign without either feeling exposed. How the seller note's risk sits against the other deal layers is mapped in deal-structure risk allocation.

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