What Does Seller Note Mean?
A seller note is a a type of vendor take back financing used to bridge the gap between the purchase price and the financeable asset base of the target company.
When companies do not have sufficient assets to securitize senior debt, buyers will provide the seller with a note bearing a set interest and terms of repayment. This strategy essentially results in having the seller self-finance all or part of the transaction.
Divestopedia Explains Seller Note
Seller notes are usually unsecured or subordinated to senior debt, which makes the debt riskier and requires a higher interest rate. Some sophisticated buyers will promote seller notes as having a better interest rate than the ongoing market rate for similar maturities.
However, a seller holding the note must ensure the interest rate is sufficient to make up for the company's risk profile and its potential inability to generate free cash flow to service and pay off the debt. A seller is better off requiring a set principal repayment schedule which, if not met, would allow the debt to convert to equity through the exercise of an equity kicker.