I would argue that the lower rate is justified because the seller note is primarily meant to maintain the seller's "skin in the game" and not purely based on the risk of their position in the capital stack as a typical bank would view it. Especially when there might be agreements in place that requires the seller's performance post closing.

I would propose that you are misunderstanding what a seller note is accomplishing for the purchaser.

From my perspective, the seller note is accomplishing the following (but there certainly could be more):

1. Helping solve for the problem of unequal information. There is no amount of due diligence that can make up for this, so having a seller note sends a strong signal that the seller has confidence in the business.

2. Helping the buyer reach a price that the seller wants. In the absence of a seller note, most buyers would be interested in the business at a greatly reduced rate. In my case, I might value a business at $5mm with a $1mm seller note, but only $4.25 without one at all--if I even remained interested.

Considering these two functions of the seller note, it becomes obvious that the seller note isn't replacing traditional financing and--therefore--shouldn't be compared to other interest rates. What I mean by this is that because seller financing isn't replacing bank financing or equity investment dollar for dollar, the regular risk-reward tradeoff that banks or other investors use to define interest rates doesn't apply. Yes, it IS a loan and needs to have a meaningful interest rate, but it isn't truly part of the financing from the perspective of the purchaser. The seller is offering a note in order to justify the otherwise-too-high price by signaling as ^redacted‌ put it that he/she has "skin in the game" and that "it's a business the purchaser can trust."

Given all of that, the market seems to be happy with seller notes hanging a few percentage points below bank rates with a floor somewhere around 4 or 5%.

All the best!