Seller financing in a business sale
Seller financing means part of the purchase price is paid over time by the buyer instead of in cash at closing, documented as a promissory note. Buyers ask for it because it bridges a financing gap and signals that the seller stands behind the numbers. Sellers accept it when the note is properly secured and the buyer is creditworthy.
Written and reviewed by Antoine Campbell. Last reviewed .
Almost every lower middle market transaction has a seller-held component. The disagreement is never whether, it is how much, on what terms, and secured by what.
Why the buyer is asking
SBA 7(a) lenders in particular treat seller debt in specific ways depending on whether it is on full standby, which affects how much of it counts toward the buyer's injection. The current rules live in the SBA's standard operating procedures, and your lender will apply the version in force at the time of the loan.
- The senior lender will only advance against a portion of the value, leaving a gap
- Lenders frequently require a seller note as part of the equity injection
- It aligns you with the transition: if the numbers were real, the note gets paid
- It can spread your tax recognition across years rather than all at closing
Terms that actually matter
| Term | What to watch |
|---|---|
| Interest rate | Should reflect real risk, not a token rate. Below-market rates can trigger imputed interest treatment. |
| Amortization and balloon | A long amortization with an early balloon means the real risk is refinancing risk. |
| Standby period | Senior lenders may require no payments to you for a defined period. Know it before you agree to the price. |
| Security | A note with no collateral behind it is a hope. Ask for a subordinate lien, a pledge of equity, or both. |
| Default remedies | Define the cure period and what you can actually do when payments stop. |
| Personal guarantee | Whether the buyer principal guarantees the note personally. |
How to protect the note
At Maurant, when a seller carries a portion, the seller chooses the security: a preferred position in the ownership entity with a defined push-out remedy, or a note with a subordinate lien and a security agreement. The economics are identical either way. Choosing security should never cost you price.
- Subordinate lien on business assets, or a subordinate deed of trust where real estate is involved
- A pledge of the buying entity's equity so a default hands you the company back rather than a lawsuit
- Financial reporting covenants so you see trouble before a missed payment
- Restrictions on additional debt ahead of your position
- An escrow or reserve funded at closing to cover early payments
Tax treatment, briefly
Payments received over more than one tax year may qualify for installment sale reporting under Internal Revenue Code section 453, which can spread the gain across the years the payments arrive. It does not apply to every part of the price, notably depreciation recapture. Your CPA should model this before you agree to the split between cash and note.
What Maurant needs to evaluate this
- The size of the gap between price and what senior debt will fund
- The buyer's equity contribution and credit
- What collateral is available and who is ahead of you on it
- Your cash needs at closing versus over time
When Maurant is not the right buyer
- Sellers who need one hundred percent of the price in cash on the closing date
- Situations where no lender will fund the senior leg regardless of the note
Questions owners ask
- How much of the price is typically seller financed?
- It varies with the credit, the collateral and the lender. Rather than quoting a number, ask any buyer to show you the whole capital stack so you can see why the gap is the size it is.
- What happens if the buyer defaults?
- That depends entirely on your security. With a lien or an equity pledge you have a defined remedy. With an unsecured note you have a lawsuit.
- Can I sell the note later?
- Sometimes, at a discount, if the note is well documented and seasoned. Do not count on it when you agree to terms.
Sources
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