What should the seller note include in the LOI to protect the seller?

Amount and percentage of enterprise value, interest rate, term, payment schedule (bullet or amortizing), subordination to bank debt, guarantees or collateral if applicable, and default clauses. What is not fixed in the LOI is negotiated later with less leverage for the seller.

What rate and term are standard for a seller note in Mexican SMEs?

In Mexican SME transactions the note typically pays between 10% and 14% annually, with terms of 2 to 5 years. The higher the risk perceived by the buyer (owner dependence, customer concentration), the higher the rate or additional guarantees for the seller; the lower the risk, the closer the rate to the buyer’s cost of financing. The standard varies by sector and business profile.

Is a bullet or amortizing note better for the seller?

The bullet note pays all principal at maturity; the amortizing note pays principal and interest in installments. For the seller, bullet concentrates counterparty risk at the end and requires the buyer to have liquidity or refinancing; the amortizing note reduces exposure over time. For the buyer, the amortizing note reduces the payment peak and is easier to sustain with business cash flow. The decision depends on expected business flow and risk appetite of both parties.

What guarantees can the seller negotiate on the note?

Security over assets of the acquired business, agreed subordination to bank debt (what happens in default), escrow of a portion of cash at closing, and in larger transactions personal guarantee of the buyer. In Mexican SMEs the most common protection is documented subordination and escrow; asset or personal guarantees depend on size and buyer leverage.

What are the most common seller mistakes when accepting the note?

Signing the LOI without defining rate, term, or payment schedule; accepting total subordination without limits or default conditions; not modeling the present value of the note versus cash at closing; and not linking the note to adjustment mechanisms (working capital, findings) already in the LOI. The seller who models the note with a calculator and compares bullet vs amortizing scenarios arrives at the negotiation with clarity.

Seller note in Mexico: how to structure it step by step

The seller note is the part of the consideration the buyer pays over time, not at closing: the seller acts as lender for a portion of the price. In Mexico, where acquisition credit for SMEs is scarce, the seller note is not a concession; it is the standard mechanism. The sections below cover rate, term, guarantees and conditions the seller must set before signing the LOI: how to structure the note so it protects the seller and is executable for the buyer.

Poorly defined rate, term and guarantees shift risk to the seller and create conflict after closing. What is agreed in the LOI reduces renegotiation in the definitive agreement.

Set amount and proportion of consideration
Define what portion of enterprise value is paid in cash at closing and what portion in seller note. The proportion depends on the risk the buyer perceives and the seller’s appetite for immediate liquidity vs. deferred return.
Negotiate rate and term
Interest rate (typically 10%–14% annually in Mexican SMEs) and term (2–5 years). The rate reflects the risk of the deal and the seller’s opportunity cost; the term must be consistent with business flow so the buyer can perform.
Define payment schedule and guarantees
Bullet (principal at maturity) or amortizing (periodic installments). Subordination to bank debt, escrow if applicable, and default conditions. What is not documented here is disputed later.
Document in the LOI or term sheet
Include in the LOI the agreed terms: amount, rate, term, schedule, guarantees and subordination. The seller note is deferred consideration; its terms must be clear before signing exclusivity.

The sections below detail each decision and how to negotiate it.

What should the seller note include in the LOI?

The following must be fixed in the LOI: amount (in pesos and as a percentage of enterprise value), annual interest rate, term in years, payment schedule (bullet or amortizing), subordination to the buyer’s bank debt, and default conditions. If the LOI mentions “seller note” without these terms, the seller negotiates with less leverage once exclusivity is signed.

Amount in pesos and percentage of enterprise value
Annual interest rate
Term in years
Payment schedule (bullet or amortizing)
Subordination to buyer’s bank debt
Default conditions

The consideration structure defines how much goes in cash at closing, how much in the note and how much in contingent; the note is a tranche with its own terms. The seller note calculator lets you project payments and accrued interest before locking numbers in the LOI.

What rate and term to negotiate?

In Mexican SMEs the note typically pays between 10% and 14% annually, with terms of 2 to 5 years. The rate reflects the risk of the deal: higher owner dependence or customer concentration justifies a higher rate or additional guarantees for the seller. The term must be consistent with business flow; a buyer that does not generate enough flow to pay the note will default or renegotiate. The seller compares the rate to their opportunity cost and to the buyer’s cost of financing when available.

The present value of the note is lower than nominal: the seller bears counterparty and time risk. The consideration structure simulator helps compare scenarios (more cash at closing vs. more note) and see total return adjusted for time.

Bullet or amortizing note?

In a bullet note the buyer pays only interest during the term and the full principal at maturity; in an amortizing note they pay principal and interest in installments (monthly or quarterly). For the seller, bullet concentrates risk at the end: if the buyer has no liquidity or refinancing, there is default. The amortizing note reduces exposure over time. For the buyer, the amortizing note reduces the payment peak and aligns better with the business’s operating flow. The decision depends on flow profile and risk appetite of both parties; there is no single standard.

What guarantees and subordination to ask for?

Subordination defines the order of payment if the buyer has bank debt: the seller note ranks behind the bank in default. The seller negotiates that subordination be documented and that there are clear default conditions (what triggers default, what remedies the seller has). An escrow — a portion of cash at closing held for 12–24 months to cover possible claims or note default — is another form of protection. In larger transactions security over business assets or the buyer’s personal guarantee is negotiated; in SMEs agreed subordination and escrow are more common. More in representations and warranties.

What are the most common seller mistakes with the note?

Signing the LOI without note terms. Accepting “X% in seller note” without rate, term or schedule leaves everything for the definitive agreement, where the seller has less leverage.
Not modeling present value. The note’s nominal amount is not comparable to cash at closing; you must discount for time and risk. Model before negotiating.
Subordination without limits. Total subordination without default conditions or remedies leaves the seller exposed if the buyer prioritizes the bank or runs into difficulty.
Ignoring the full structure. The note is one tranche of the consideration; the seller must look at cash at closing, note and contingent together. The guide on how to structure a purchase offer in Mexico walks through how the note fits in the offer.

In this guide:

How to sell your company in Mexico — sale process and closing.

How to structure a purchase offer in Mexico — price, consideration and conditions.

Earn-outs in Mexico: how common they are and how to structure them — prevalence and how to structure the contingent tranche.

How to buy a company in Mexico — guide for buyers.

Due diligence in Mexico: a guide for sellers and buyers — what it covers and how to prepare.

Valuation methods for businesses in Mexico: when to use each — EBITDA, SDE, DCF and more.

How to negotiate with an institutional buyer in Mexico — strategies and dynamics.

What do sellers ask about the seller note?

What should the seller note include in the LOI to protect the seller?: Amount and percentage of enterprise value, interest rate, term, payment schedule (bullet or amortizing), subordination to bank debt, guarantees or collateral if applicable, and default clauses. What is not fixed in the LOI is negotiated later with less leverage for the seller.
What rate and term are standard for a seller note in Mexican SMEs?: In Mexican SME transactions the note typically pays between 10% and 14% annually, with terms of 2 to 5 years. The higher the risk perceived by the buyer (owner dependence, customer concentration), the higher the rate or additional guarantees for the seller; the lower the risk, the closer the rate to the buyer’s cost of financing. The standard varies by sector and business profile.
Is a bullet or amortizing note better for the seller?: The bullet note pays all principal at maturity; the amortizing note pays principal and interest in installments. For the seller, bullet concentrates counterparty risk at the end and requires the buyer to have liquidity or refinancing; the amortizing note reduces exposure over time. For the buyer, the amortizing note reduces the payment peak and is easier to sustain with business cash flow. The decision depends on expected business flow and risk appetite of both parties.
What guarantees can the seller negotiate on the note?: Security over assets of the acquired business, agreed subordination to bank debt (what happens in default), escrow of a portion of cash at closing, and in larger transactions personal guarantee of the buyer. In Mexican SMEs the most common protection is documented subordination and escrow; asset or personal guarantees depend on size and buyer leverage.
What are the most common seller mistakes when accepting the note?: Signing the LOI without defining rate, term, or payment schedule; accepting total subordination without limits or default conditions; not modeling the present value of the note versus cash at closing; and not linking the note to adjustment mechanisms (working capital, findings) already in the LOI. The seller who models the note with a calculator and compares bullet vs amortizing scenarios arrives at the negotiation with clarity.

Sources

What to read after this guide?

The seller note is documented in the LOI together with the rest of the consideration structure; once its terms are agreed, the next stage is due diligence. The guide on Due diligence in Mexico: a guide for sellers and buyers details what areas the buyer covers and how to prepare so the LOI price and structure hold.

What are the steps to structure the seller note?

Set amount and proportion of consideration

Negotiate rate and term

Define payment schedule and guarantees

Document in the LOI or term sheet