Seller Financing Fills a Void in Today’s M&A Market
May 12, 2025
By Tom Cavanagh, Vice President & Shareholder
Tom Cavanagh
Vice President & Shareholder
In today’s uncertain market, seller financing is increasingly becoming a tool for closing the gap between buyer and seller expectations. With rising interest rates, tighter credit markets, and some softness in earnings across sectors, many deals are stalling, and not necessarily due to a lack of interest. Seller financing is being utilized to share risk and improve the capital structure overall to get over the hump.
Seller notes are a form of financing which allows the seller to defer part of the purchase price over time, typically in the form of a subordinated promissory note. It helps buyers preserve cash or secure bank debt, while allowing sellers to bridge valuation gaps and defer tax payments. It is typical for transactions to be structured with around 20% made up of seller notes and/or less-certain earnouts.
Sellers may initially be opposed to the idea of taking on risk post-closing, but many are seeing the upside: an ability to get deals done at reasonable valuations and potentially earn interest in the 6–10% range on the deferred balance. For sellers with confidence in their company’s future performance and the buyer’s ability to operate the business, the risk is often worth the reward. Amortizing the seller note over an extended period (e.g., 10 years) but with a balloon payment sooner can put less strain on near term cash flows for the business while requiring a repayment in the shorter term.
Additionally, from a buyer’s perspective, seller financing not only reduces the initial capital outlay but also signals a seller’s continued confidence in the business. While not contingent on meeting certain thresholds, it does align incentives as it is in the seller’s best interest the business does well post-transaction to ensure timely payment. Seller notes can also serve in place of indemnification escrows, providing the seller with a higher return than the minimal interest paid on escrow balances, if any.
As M&A activity remains steady but cautious in 2025, expect seller financing to continue playing a crucial role in getting deals across the finish line.
Published in ABI Business Monthly (in Corridor Business Journal and Quad Cities Business Journal), May 12, 2025.