What a Seller Note Is and When to Accept One

Many PT practice sales are not paid entirely in cash at closing. Part of the price often comes later. One common way that happens is a seller note.

A seller note can help a deal close. It can also leave you carrying risk you did not plan for. Here is how it works and how to decide what is reasonable.

What a seller note is

A seller note is a loan from you to the buyer. Instead of paying the full price at closing, the buyer pays part of it over time. You receive scheduled payments, usually with interest, after the sale.

Say a buyer offers $1,500,000 for your clinic's assets. The offer might be $1,200,000 in cash at closing and a $300,000 seller note. You receive the cash on day one. The remaining $300,000 arrives in payments over the note's term.

Buyers ask for seller notes for a few reasons. Some cannot borrow the full price from a bank. Some lenders require the seller to carry part of the price. And some buyers simply want you to share the risk of the transition.

A seller note signals that you believe the practice will keep performing. That is a fair thing for a buyer to want. The question is how much belief you should be asked to finance.

The terms that matter

A seller note is a contract, and the details decide how safe it is. Look closely at these terms:

• Principal. The amount you are lending, which is the part of the price not paid at closing.
• Interest rate. What the buyer pays you for waiting. It should reflect the risk you are taking.
• Term and schedule. How long the note runs and how often payments come, often monthly or quarterly.
• Security. What you can claim if the buyer stops paying, such as a lien on the clinic's assets.
• Guarantee. Whether a parent company or the owner personally backs the note.
• Subordination. Whether a bank gets paid before you if things go wrong.
• Default terms. What counts as a missed payment and what you can do about it.

Subordination deserves extra attention. If a bank lent the buyer most of the money, the bank will often require your note to sit behind its loan. That means you get paid only after the bank in a default.

Once you close, you no longer control the clinic. If the buyer loses therapists, changes the referral relationships, or mismanages billing, the practice can weaken. Your note payments depend on a business you no longer run.

That is why a seller note should be treated as a loan with real risk, not as guaranteed money. Price it and secure it accordingly.

How to size a seller note

There is no single correct size. But a few practical tests help.

First, decide what cash at closing you need to be comfortable. That number should cover your debts, your taxes and your next chapter. Anything the buyer pays in a note is money you could wait for or lose.

Second, ask whether you could live with the note going unpaid. If losing it would hurt badly, the note is too big. Push for more cash at closing or a smaller note.

Third, compare the note to the buyer's strength. A large buyer with a strong balance sheet and a guarantee is one kind of risk. A first-time buyer funding the deal with heavy debt is another.

Comparing offers with a note

A dollar paid later is worth less than a dollar paid today. When you compare two offers, do not just add up the headline numbers.

Say Offer A is $1,400,000 all cash. Offer B is $1,500,000, with $1,100,000 in cash and a $400,000 note over five years. Offer B is $100,000 higher on paper. But you are receiving $300,000 less at closing and waiting years for the rest. Offer A may be the better deal for you.

Interest on the note helps close the gap. It does not remove the risk of nonpayment.

When a seller note makes sense

A seller note can be reasonable when the cash at closing already meets your needs. It also helps when the buyer is creditworthy, the note is secured, and the term is short. In those cases, it can help you get a higher total price or a better buyer.

It makes less sense when it carries a large share of the price. Weak security, long terms and a thinly capitalized buyer are warning signs too.

Any note should be drafted by your transaction attorney. The tax treatment of payments over time is a question for your CPA.

Your next step

Write down the minimum cash at closing you would need to say yes. Keep that number private. When offers arrive, measure every seller note against it before you look at the total price.