Promissory Note in Business Acquisitions: What It Is and What to Include
A promissory note is the legal document that records a debt obligation. In a business acquisition, it's the instrument the buyer signs to formalize seller financing — a written promise to pay the seller a specified amount, on a specified schedule, at a specified interest rate. Without a properly drafted promissory note, there's no enforceable debt instrument, and the seller has no legal basis for collection.
What a Promissory Note Must Include
- Principal amount — the total amount borrowed
- Interest rate — fixed or variable, expressed as an annual percentage rate
- Payment schedule — monthly, quarterly, or other; whether amortizing or interest-only with balloon
- Maturity date — when the final payment is due
- Maker and payee — the borrower (buyer or acquisition entity) and the lender (seller)
- Default provisions — what constitutes default and the cure period before the seller can exercise remedies
- Acceleration clause — right to declare the full balance due immediately upon default
- Governing law — which state's law governs disputes
- Personal guarantee — if the buyer is purchasing through an entity, the seller typically requires the buyer to personally guarantee the note
Secured vs. Unsecured Notes
A promissory note can be unsecured (based solely on the buyer's promise to pay) or secured by a lien on business assets. Sellers should almost always insist on a secured note backed by a UCC financing statement filed with the state — this gives the seller a perfected security interest in business assets, allowing them to seize assets in the event of default. An unsecured note requires a lawsuit and judgment before any collection can proceed.
If there's also an SBA loan, the bank's lien is senior — the seller's security interest is subordinate. But a subordinate lien is still meaningfully better than no lien.
Standby Provisions
Under SOP 50 10 8.1, Appendix 15 (effective October 1, 2026), seller debt used toward the required equity injection must have no principal or interest payments for the term of the SBA 7(a) loan. Seller debt, other qualifying standby debt and qualifying non-controlling minority equity investments together may supply no more than half of the required injection; the cap is shared, not separate for each source. Other seller debt needs lender-approved repayment and subordination terms. See the SBA calculator guidance; a two-year standby is not sufficient for equity credit.
Promissory Note vs. Seller Note
These terms are used interchangeably. "Seller note" typically refers to the concept of seller-financed debt in a deal; "promissory note" refers to the specific legal document recording that debt. The seller note is evidenced by a promissory note. Both terms appear in deal negotiations — they mean the same thing in context.
Deal-Model Context
A promissory note is the debt instrument that records the borrower's obligation to pay. In acquisitions, it often documents seller financing, standby debt, deferred payments, or a buyer note used to bridge a funding gap.
In the model, the note affects both cash at closing and future debt service. Record principal, interest rate, amortization, maturity, payment frequency, standby period, collateral, guarantees, default rights, and whether payments are subordinate to bank debt.
Buyer Diligence Questions
Diligence should include how the note interacts with lender requirements. An SBA lender may require standby terms, subordination, or limits on seller-note payments. A seller may request collateral or a personal guarantee in exchange for carrying paper.
This term connects to seller financing, seller notes, SBA loans, and DSCR. Ask whether the note is secured, whether it can be prepaid, what happens after default, and whether its payment schedule leaves enough cash for operations.
Related Terms
- Seller financing — the arrangement that the promissory note documents
- Seller note — the conceptual term for seller-financed debt
- UCC filing — how the seller perfects a security interest to back the note
- SBA 7(a) loan — the senior lender whose standby requirements affect the note terms