Seller financing in cannabis deals

Why is seller financing so common in cannabis sales?

Because the usual acquisition lender is missing. In most industries a buyer of a $2 million business would apply for an SBA 7(a) loan. SBA SOP 50 10 8, effective 1 June 2025, makes marijuana businesses ineligible, and specialist cannabis lenders mostly write loans of $10 million or more. For the small and mid-sized deals that make up most of the market, that leaves buyer cash and the seller.

For context, across all industries brokers surveyed for the IBBA and M&A Source Market Pulse reported that sellers averaged 76% to 89% cash at close in 2025, with seller financing described as a common tool for bridging valuation gaps. Those averages include deals funded with bank and SBA debt. Take the bank away and the seller’s share has to rise, the price has to fall, or the buyer has to bring more cash.

Even the largest players use it. Innovative Industrial Properties, a public REIT, carried $49.0 million of an $88.5 million property sale to its own tenant in 2026.

What terms are typical on a cannabis seller note?

Every term is negotiated, and no public survey tracks cannabis notes specifically. The table sets out the usual range of structures and the reference points that exist.

Term	Common approach	Reference point
Down payment	Large enough that the buyer has real money at risk	No cannabis data; a seller carrying more than half the price is taking equity risk for a lender’s return
Interest rate	Fixed	General small-business notes commonly 6% to 10% (Morgan and Westfield data via Iconic, Aug 2026); cannabis lender portfolios yielded 13.2% to 15.8% at 30 June 2026 (AFC, Chicago Atlantic)
Term	Three to seven years	Shorter than most buyers want, longer than most sellers want
Amortisation	Fully amortising, or a longer schedule with a balloon	A balloon assumes the buyer can refinance, which in cannabis is not a safe assumption
Security	Equity pledge, equipment lien, real estate, guaranties	The licence itself is weak collateral; see seller notes and security interests
Covenants	Financial reporting, licence in good standing, taxes current, no further debt without consent	Mirrors what institutional lenders require
Default remedies	Acceleration, default interest, step-in subject to regulator approval	Remedies that touch ownership need the state’s consent

Illustrative: the same note, two schedules

A seller carries $1.5 million at 8% fixed.

	Five-year full amortisation	Ten-year schedule, balloon at year five
Monthly payment	$30,414	$18,199
Annual debt service	$364,970	$218,390
Balance due at year five	$0	about $897,500

The longer schedule frees about $146,600 a year of cash flow, which can be the difference between a business that copes with a bad year and one that defaults. The price is refinancing risk on the balloon. Sellers who agree to a balloon should ask what happens if no refinancing is available: an automatic extension at a higher rate is better for both sides than a default. You can test other combinations with the seller-note and sale-leaseback calculator.

How much debt can the business carry?

Size the note to cash flow after tax, not to EBITDA. Adult-use operators still cannot deduct ordinary operating expenses under section 280E, so income tax takes a much bigger share of profit than in other industries. A dispensary with $1.0 million of EBITDA may have only $650,000 to $750,000 left after income tax. If note payments are $365,000, coverage is about 1.8x to 2.0x. That is workable. If a senior lender or landlord also has a claim, it may not be. The 280E arithmetic is on 280E explained for buyers and sellers.

Qualifying medical activity came out of 280E going forward under the April 2026 Schedule III order, which improves coverage for medical operators. Do not assume the same for adult-use revenue.

How is a seller note taxed?

A note usually lets the seller spread the gain. Under the installment method described in IRS Publication 537, gain is reported in proportion to payments as they are received, on Form 6252. Four limits matter in a business sale:

1. Inventory does not qualify. Gain on inventory is reported in the year of sale even if paid later. Cannabis inventory is often a meaningful part of price; see inventory and biomass at closing.
2. Depreciation recapture is taxed up front. Recapture income is reported in the year of sale whether or not any payment arrives that year. A cultivation or extraction business with heavily depreciated equipment can owe real tax on day one.
3. Interest must be adequate. If the note’s rate is below the applicable federal rate, sections 1274 and 483 recharacterise part of the principal as interest.
4. Large notes carry an interest charge. Section 453A applies an interest charge on deferred tax where installment obligations exceed $5 million. Pledging the note as collateral for a loan is treated as receiving payment.

Because of points 1 and 2, the purchase-price allocation decides how much of the gain can actually be deferred. A seller can also elect out of the installment method and report everything in the year of sale. The wider tax picture is on taxes when selling a cannabis business.

Does the regulator need to know about the note?

Usually, yes. California’s 4 CCR 15004 treats a person who provides a loan to a licensee as a financial interest holder who must be disclosed. Other states reach a similar result through source-of-funds or true-party-of-interest rules. The practical consequences:

• List the note and the seller as a funding source in the change-of-ownership application.
• Keep the note a note. Interest tied to revenue or profit, conversion rights, or a veto over operations can turn the seller back into an owner or controlling person in the regulator’s eyes. The framework is in true party of interest and financial interest rules.
• Expect to stay on the regulator’s record until the note is repaid.

How do both sides protect themselves?

Sellers

1. Take a meaningful down payment. It is the best predictor of whether the buyer will fight to keep the business.
2. Vet the buyer like a lender would: personal financial statement, source of funds, operating experience, and the ability to pass the state’s background check.
3. Take every form of security available, and file a UCC-1. Collateral law and the limits on licence liens are covered on the sibling page linked above.
4. Require monthly financials and proof that state excise taxes and federal income taxes are being paid. Unpaid taxes can prime your position; see tax liabilities and holdbacks.
5. Keep your own licensing eligibility current. If you ever have to step back in, the state must approve you again.

Buyers

1. Negotiate a right of set-off, so that indemnity claims for undisclosed liabilities can be deducted from note payments rather than chased in court.
2. Ask for an interest-only period while the transition settles.
3. Avoid a balloon you cannot realistically refinance. If you accept one, get an extension option.
4. Make sure the note is prepayable without penalty.
5. If there is a senior lender, settle the subordination terms before signing, not after.

How does a seller note affect price?

A seller who will carry paper widens the pool of buyers, and a wider pool supports price. The trade is risk: part of the price now depends on the buyer’s performance in a volatile, heavily taxed industry. Sellers reasonably ask for a somewhat higher headline price or rate in exchange, and buyers reasonably resist paying a premium for financing they have no alternative to. How cash, notes, and stock compare is set out on cash vs stock vs seller note, and where notes sit among other funding sources is on cannabis acquisition financing options.

This is educational material, not legal, tax, or lending advice. If you are weighing whether to carry a note or how much, you can book a confidential intro call.