Promissory note

A note is a simple instrument compared to a full loan agreement, but simple does not mean unimportant. It states the principal, the interest basis, the repayment schedule, what counts as default, and what the lender can do about it — and on a vendor take-back, it is frequently the only document standing between a seller and years of unsecured exposure to the buyer’s ability to run the business.

What a note usually sits alongside

• A general security agreement, if the seller wants collateral rather than an unsecured promise
• A personal guarantee from the buyer individually, in addition to the corporate promise to pay
• A subordination or intercreditor agreement, if a bank or BDC loan is also financing the deal
• An acceleration clause allowing the seller to demand the full remaining balance immediately on a missed payment

What commonly goes wrong

Sellers sometimes accept a note with no security and no subordination terms agreed with the senior lender, only to discover after closing that the bank’s general security agreement effectively absorbs everything if the business struggles, leaving the seller’s note worth far less than its face value. A note negotiated at the same time as the senior financing, rather than as an afterthought, tends to hold up better.

Assignability

A promissory note is a negotiable instrument in most circumstances, meaning the party holding it can typically sell or assign the right to be repaid to someone else. A seller carrying a note should understand whether the note as drafted permits that, since it affects who the buyer may end up owing money to over the repayment period.