As the Federal Reserve continues to navigate a challenging economic landscape, dealmakers in the lower-middle market are adjusting to a shifting credit environment. In June 2025, the Fed’s dot plot retained the median forecast of two rate cuts by year-end. However, diverging views among Federal Open Market Committee (FOMC) members signaled uncertainty. Seven members now project no easing at all, and the expected range for the federal funds rate at year-end spans 150 basis points.
This policy dispersion is prompting buyers and sellers to rethink transaction structures. Without a clear rate trajectory, seller notes are gaining traction as adaptable capital instruments. They help bridge valuation gaps, align incentives, and maintain deal momentum.
Credit Markets Signal Caution
Senior debt spreads have widened in response to inflationary pressure and evolving risk assessments. As a result, many lenders are demanding higher premiums, especially for small business and acquisition loans. This shift is increasing underwriting hurdles and limiting how much leverage buyers can take on.
Because senior debt is harder to access and mezzanine capital is more expensive, sellers are often extending more flexible terms to facilitate deals. Seller notes are proving to be the preferred solution. They offer a built-in capital buffer and allow buyers to preserve liquidity.
Seller Notes Reprice Risk and Align Stakeholders
Seller notes, especially when structured with performance-based payouts or equity components, enable both parties to manage valuation gaps and capital constraints. Buyers benefit by reducing upfront payments. Meanwhile, sellers maintain upside potential linked to the business’s future performance.
When debt affordability is uncertain, seller notes serve both as financing tools and as risk-sharing mechanisms. For sellers, these instruments can convert illiquid assets into scheduled payouts. For buyers, seller financing often accelerates closing by reducing the need for additional third-party funding.
Institutional Interest in Seller-Backed Paper
Professional investors are increasingly viewing seller notes as appealing short-duration private credit. Yields on these notes average around 8 percent, ranging from 6 to 10 percent. This compares favorably to SBA 7(a) loan rates, which currently fall between 10 and 12 percent.
In many lower-middle-market transactions, seller-backed financing now outperforms traditional bank lending. Institutional funds focused on private debt and structured credit are integrating seller paper into diversified portfolios. These investments often come with personal guarantees and enforceable covenants, which add layers of security. Investors also bring underwriting rigor and post-close monitoring—critical for noteholders seeking early exits.
Flexibility Enables Execution in an Uncertain Environment
Waiting for monetary policy consensus is not an option for most dealmakers. As interest rate paths remain uncertain, deals continue to close using creative financing terms. Earn-outs, deferred payments, hybrid equity, and seller tranches are all becoming more common. Among these, seller notes stand out for their adaptability. They allow buyers and sellers to finalize terms despite economic headwinds.
According to the Q1 2025 IBBA Market Pulse Report, seller financing appears in more than 75 percent of small and lower-middle-market deals. These listings command an average 15 percent valuation premium over all-cash offers.
In smaller transactions—especially those under $2 million—seller notes often outperform bank financing in both structure and speed.
Supporting a Demographic Shift
A major supply driver of seller notes is demographic. Roughly 2.3 million baby boomer–owned businesses remain in the succession pipeline. Yet only 20 percent have formal transition plans in place. Many owners are now relying on seller-financed exits to realize the value of their businesses.
Seller Edge Capital supports these transitions through full and partial buyouts of seller paper. Our underwriting process emphasizes transparency, enforceable covenants, and investor protection.
Looking Ahead
As interest rate uncertainty continues and traditional credit remains tight, seller notes are evolving from alternative to essential. Their ability to accommodate shifting valuations, reduce risk, and support deal execution makes them indispensable in the current market environment.
For sellers holding promissory notes or for investors seeking strong risk-adjusted returns, structured seller-backed instruments represent a timely and strategic asset class.
Sources Cited
- Dot plot projections for 2025 reveal a wide range of forecasts. Federal Reserve Board June 2025 Summary of Economic Projections.
https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20250612.htm - SBA 7(a) loan rates and tightening commercial lending activity. U.S. Small Business Administration.
https://www.sba.gov/funding-programs/loans/7a-loans - Seller note yields and comparisons with senior debt structures. GoDocs.
https://godocs.com/why-small-business-loans-are-poised-to-surge-in-2025-and-2026 - Seller financing prevalence and valuation premium statistics. IBBA Market Pulse Q1 2025 Report.
https://www.ibba.org/wp-content/uploads/2025/05/market-pulse-highlights-q1-2025.pdf - Baby boomer business transitions and succession readiness. Project Equity.
https://project-equity.org/insights/boomer-owned-business-succession-crisis/ - Small-business borrower reports on covenant tightening. Federal Reserve Small Business Credit Survey.
https://www.fedsmallbusiness.org/reports/survey - Growth in institutional investment in seller-backed promissory notes. PitchBook Private Credit Report Q2 2025.
https://pitchbook.com/news/reports/q2-2025-private-credit-report