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Acquisition note: How it funds the final slice of a deal
An acquisition note is the piece of paper that lets a business purchase actually close when bank financing alone leaves a gap of 10 to 25 percent of the price.
From my experience working with buyers and sellers across the country, an acquisition note appears in roughly two-thirds of all small-business sales financed through SBA or conventional bank debt, and it is the single most common form of bridge financing in lower-middle-market deals.
This piece walks through what an acquisition note is, how it gets structured, and what the seller can do with the paper after closing.
What an acquisition note is
An acquisition note is a promissory note signed by the buyer of a business at closing, payable to the seller, that covers a portion of the purchase price the buyer cannot fund in cash or through senior bank debt. The seller becomes a private lender on that slice of the deal.
Plain definition
The seller agrees to receive part of the purchase price over time rather than at closing. The buyer signs a real, enforceable promissory note for that amount, and a security agreement records the seller’s lien position on the business assets. The seller earns interest on the unpaid balance until the note pays off.
Acquisition note vs carry note vs earn-out
The terms are often used interchangeably in practice, although there are subtle differences. A seller note typically refers to any owner-financed paper, while an acquisition note specifically refers to paper used in a business sale.
An earn-out is a different instrument entirely with payments contingent on future business performance. An acquisition note carries fixed payment obligations regardless of post-closing performance. That being said, most operators and most lenders treat the labels as synonyms in casual conversation.
How an acquisition note gets structured
Every acquisition note has the same skeleton even when the dollar figures shift. Understanding the standard structure makes the negotiation cleaner on both sides of the table.
Standard terms
Interest rates run 6 to 10 percent fixed, with 7 to 8 percent the most common band today. Amortization runs 5 to 15 years, often with a balloon at year 5 or 7. The principal covers the gap between senior debt plus buyer cash equity and the agreed purchase price, typically 10 to 25 percent of total deal value.
Subordination provisions
Where an SBA or bank loan is in first position, the acquisition note sits in second-lien position. Subordinated seller notes carry a standby period (24 months is typical) during which the seller cannot accept payments if the senior lender objects. A working knowledge of business note investing helps the seller understand how the secondary market prices subordination risk.
Security and collateral
The seller protects the receivable through three coordinated layers of security that work together to give the seller real recourse if the buyer stops paying.
UCC filings
A UCC-1 financing statement filed with the buyer’s home state secretary of state perfects the seller’s lien on the business assets (inventory, equipment, accounts receivable, intangibles). The seller’s actual lien position depends on the order of filings, which is why UCC searches matter on every acquisition.
Personal guarantees
The buyer (and often the buyer’s spouse) signs a personal guarantee covering the note balance. The guarantee gives the seller recourse beyond the business assets if the company fails and the collateral does not fully cover the remaining balance.
Standby periods
SBA-tied acquisition notes typically include a 24-month standby provision in the subordination agreement. During the standby period the buyer may make interest-only payments or no payments at all, depending on the senior lender’s terms. The standby protects the bank’s cash flow priority during the riskiest early months of the buyer’s ownership.
When buyers and sellers use them
Acquisition notes show up in three distinct deal contexts, and the structure shifts a bit in each one based on what the senior lender requires.
SBA-backed acquisitions
SBA 7(a) acquisition loans cap at 90 percent of deal value, leaving at least 10 percent for the buyer. Most buyers cannot bring a full 10 percent in cash, so the seller bridges roughly 5 percent of that gap with an acquisition note. Without the seller carry the deal does not close.
Conventional deals
On conventional bank-financed acquisitions outside the SBA program, the senior lender finances 60 to 75 percent of deal value. The acquisition note fills 10 to 20 percent, and the buyer brings 15 to 25 percent in cash. Conventional deals give both sides more negotiating room because the SBA’s specific subordination rules do not apply.
When NOT to use one
An acquisition note adds collection risk to the seller’s life. Where the buyer has strong credit, meaningful cash equity, and access to senior debt that covers the full price, the seller is usually better off with an all-cash close. Sellers should also avoid carrying paper on buyers with thin operating history.
What happens after closing
The seller’s work does not end at closing. The note has to be serviced, the buyer has to be monitored, and the seller has the option to sell the paper on the secondary market for a lump sum.
Servicing mechanics
Most sellers either self-service the note (collecting ACH payments directly) or hire a third-party servicer for a small monthly fee. Either path needs to capture monthly payment receipts, annual tax-reporting on interest income, and ongoing financial monitoring of the buyer. Following note servicing best practices from month one keeps the note marketable later and protects the seller’s ability to enforce on default.
Selling the note for cash
Once the note has 12 to 24 months of clean payment history, the seller can sell it on the secondary market in order to access an immediate lump sum at a discount to face value. Pricing depends on the buyer’s credit, the lien position, and the seasoning.
Selling a seller-financed business note is straightforward when the documentation package is complete, while selling a note secured by business assets without clean UCC filings or current asset valuations takes longer and prices lower. A proper seller note valuation early in the process avoids weeks of back-and-forth later.
Most sellers work with a business note broker or sell directly to an institutional buyer. The choice depends on the deal size and how much the seller wants to manage the process.
Sellers who want to understand the brokerage workflow can read our piece on how to broker business notes. Sellers comparing buyer offers should also study the difference between performing vs non-performing business notes in order to understand the pricing logic behind every offer.
An acquisition note is one of the most flexible instruments in private-business finance, and it is the reason a huge portion of small-business sales actually close. Structure it carefully, secure it properly, and service it on time. Good luck on your transaction.