Understanding Seller Notes in M&A: Insights from 100 LOIs

A seller note is a form of seller financing in which the seller of a business agrees to defer a portion of the purchase price and receive it over time, typically with interest. This form of seller financing allows buyers to reduce their upfront capital requirements while providing sellers with additional compensation in interest payments over the life of the note.

Commonly used in lower middle market deal structures, seller notes serve multiple purposes, including:

• Bridging valuation gaps between buyers and sellers
• Allowing buyers to reduce upfront equity or debt requirements
• Incentivizing sellers to remain invested in the long-term success of the business

Following up on our previous article on earnout structures, today, we’re sharing Axial platform data from a select set of 100 Letters of Intent (LOIs) that include a seller note as part of the deal structure.

The data included in this piece comes from a limited set of 100 Axial member transactions. Our inferences are only meant to be an indicative representation of potential trends across the lower middle market. This is not a comprehensive study.

Select LOIs w/ Seller Notes

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Seller Note % of TEV | By Company Type

Family Offices typically pursue acquisitions with a patient capital focus, prioritizing long-term investments and relationships. This strategic approach may make them more inclined to negotiate higher seller notes, which allows owners to stay connected with the business post-exit and receive additional compensation via interest on deferred payments. 

Independent Sponsors and Search Funds often rely on external financing or co-investors. The ability to defer a portion of the purchase price can help bridge the gap between the available capital and the business valuation, enabling these buyers to win deals and complete transactions while sharing some financial risk with the seller.

Private Equity firms, with their access to institutional capital and leveraged financing, are allowed the ability to structure deals with lower reliance on seller notes. Corporations and HoldCos often use cash from their balance sheets to fund acquisitions, making them better positioned to provide upfront capital or negotiate smaller seller notes. For Individual investors, the lower ratio could be due to targeting smaller deals with less complex financing structures.

Seller Note % of TEV | By Industry

Technology’s median seller note percentage of 21% is likely due to higher valuations and the inherent risks of its rapidly evolving market. Sellers may defer payments to help buyers manage risk while also earning interest on the note. Transportation deals also have elevated seller note ratios, likely reflecting the industry’s capital-intensive nature. Buyers may leverage seller financing to preserve upfront capital for operational investments or future growth.

Healthcare businesses, with their recession-resistant qualities, exhibit some of the lowest median seller note percentages. Buyers may rely more on upfront capital to secure deals, reflecting the essential nature of the industry and its perceived stability.

Business Services companies are often asset-light, service-oriented, and focused on recurring revenue models. Buyers in this sector may have less need for seller notes to manage risk or bridge valuation gaps.

Deal Size vs. Seller Note Percentage

Looking at the chart above, there is a modest correlation showing that smaller transactions tend to have higher seller note percentages compared to larger transactions. Seller notes may be more heavily utilized in smaller deals to bridge valuation gaps or address capital constraints. In larger transactions, the reliance on seller notes decreases, as buyers may have access to more substantial funding sources or prefer to pay more upfront to simplify the deal structure. The outliers in the chart, where seller note percentages exceed 40%, suggest instances where unique deal dynamics, such as higher risk or buyer constraints, require greater use of seller financing.

Axial is the trusted deal platform serving the lower middle market ($2.5-$250M TEV).

Over 3,500 advisory firms and 3,000 corporate and financial buyers have joined Axial to efficiently connect with relevant capital partners, source actionable deals, and build new relationships.

Visit the Member Closed Deals page to see selected transactions that have been sourced and closed via Axial.

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