Seller Financing: When It Makes Sense and How to Structure It

Most business sellers want all cash at closing. That's understandable — you've built the business, and you want your money. But in practice, many deals include some form of seller financing, and in some cases, offering a seller note can actually improve your total outcome.

Understanding when seller financing makes sense, how to structure it properly, and how to protect your downside is essential for any business owner entering the M&A process.

What Is Seller Financing?

Seller financing (also called a seller note or vendor take-back) means the seller loans a portion of the purchase price to the buyer, who pays it back over time with interest. Instead of receiving the full purchase price at closing, you receive a portion upfront and the remainder through scheduled payments.

A typical seller note might be structured as:

• 10-30% of the purchase price
• 3-7 year term
• 5-8% interest rate
• Monthly or quarterly payments
• Secured by the business assets (subordinated to senior lender)

Why Buyers Want Seller Financing

From the buyer's perspective, seller financing solves several problems:

Bridging the financing gap. Most SBA loans cover 80-90% of the purchase price, and the buyer's equity injection covers another portion. A seller note fills the remaining gap, making the deal financially feasible.

Alignment of interests. If you're financing part of the deal, you have an incentive to ensure a smooth transition. Buyers see this as a positive signal — you're putting your money where your mouth is.

Reducing total capital cost. Seller note interest rates are typically lower than mezzanine debt or equity costs. For the buyer, it's efficient capital.

SBA requirements. For SBA-financed acquisitions, the SBA often requires (or strongly prefers) that the seller carry a note, typically on standby for the first 24 months (interest-only or fully deferred) while senior debt is serviced.

When Seller Financing Benefits the Seller

While the default preference is all-cash, there are scenarios where offering a seller note actually works in your favor:

Higher Total Purchase Price

A buyer who needs to finance 100% of the deal externally faces higher capital costs and more risk. By offering a seller note, you reduce the buyer's risk — and they'll often pay a higher total price in return. A $5M deal with a $1M seller note at 6% may net you more than a $4.5M all-cash deal.

Tax Advantages

Seller financing creates an installment sale for tax purposes. Instead of recognizing the full capital gain in the year of sale, you spread the gain over the term of the note. Depending on your tax situation, this can result in meaningful tax savings — particularly for sellers in high-tax states like California.

Consult your tax advisor, but installment sale treatment can reduce your effective tax rate by keeping you in lower brackets across multiple years.

Expanding the Buyer Pool

Some qualified buyers simply can't get to 100% cash. If you insist on all-cash, you eliminate a significant portion of your buyer pool — particularly individual buyers and smaller PE groups. A willingness to carry a note brings more competitive tension to your process.

Faster Close

Deals with seller financing can close faster because the buyer has fewer external financing contingencies to satisfy. Less dependence on third-party lenders means fewer delays.

How to Structure a Seller Note Properly

If you're going to carry a note, the structure and protections matter enormously.

Security Interest

Your note should be secured by the assets of the business — accounts receivable, equipment, inventory, intellectual property. If the buyer defaults, you have a claim on business assets. In most deals, the seller note is subordinated to the senior lender (bank or SBA), meaning the bank gets paid first, but you still have a secured position ahead of unsecured creditors.

Personal Guarantee

Whenever possible, negotiate a personal guarantee from the buyer (or the buyer's principals). This gives you recourse beyond just the business assets if the buyer defaults.

Financial Covenants

Include covenants that give you visibility and protection:

• Quarterly or annual financial statements delivered to you
• Minimum EBITDA or revenue thresholds — if the business falls below a certain level, you have the right to accelerate the note
• Change of control provisions — if the buyer sells the business, your note becomes immediately due
• Restrictions on additional debt that could impair your position

Standby and Payment Terms

If the deal involves SBA financing, the SBA will typically require the seller note to be on full standby for 24 months — meaning no payments of principal or interest during that period. After standby, payments begin on whatever schedule is negotiated.

For non-SBA deals, you have more flexibility. Common structures include:

• Interest-only for 12-24 months, then amortizing principal and interest
• Fully amortizing from day one over 3-5 years
• Balloon payment — smaller payments during the term with a large final payment

Subordination Agreement

If there's a senior lender involved, you'll need a subordination agreement (also called an inter-creditor agreement) that defines the relationship between the senior debt and your note. Pay attention to:

• Payment blockage provisions (when the senior lender can stop your payments)
• Standstill provisions (limits on your ability to enforce the note)
• Cure rights (your ability to step in if the buyer defaults on senior debt)

Seller Note Risks and How to Mitigate Them

Default Risk

The obvious risk: the buyer doesn't pay. Mitigation:

• Thorough buyer due diligence — understand their financial position, experience, and capability
• Strong security interest and personal guarantee
• Financial covenants with early warning triggers
• Limit the note to 20-30% of the total deal — don't over-lever your exposure

Business Decline Risk

The business may perform worse under new ownership. Your note is only as good as the business's ability to service it. Mitigation:

• Provide a thorough transition
• Ensure the buyer has a realistic understanding of the business
• Include financial covenants that trigger before the situation becomes critical

Subordination Risk

If the senior lender has priority and the business struggles, your note may not get paid even though the business is still operating. Mitigation:

• Negotiate reasonable subordination terms — push back on aggressive payment blockage provisions
• Ensure the total debt load (senior plus your note) is sustainable relative to the business's cash flow
• Include a change of control provision so your note accelerates if the business is sold

When to Say No to Seller Financing

Sometimes seller financing is the wrong move:

• The buyer is undercapitalized and using your note as a substitute for their own equity. If the buyer has no skin in the game, your risk is disproportionate.
• The note is too large relative to the deal. Carrying 40-50% of the purchase price is excessive risk for most sellers.
• The buyer lacks operating experience in your industry. A seller note on a deal where the buyer is likely to struggle is a bad bet.
• You need the cash. If your financial plan requires the full proceeds at closing, don't compromise that for a deal that leaves you exposed to repayment risk.

The Bottom Line

Seller financing is a tool, not a concession. Used strategically, it can increase your total proceeds, improve tax efficiency, and expand your buyer pool. Used carelessly, it can leave you exposed to repayment risk on a business you no longer control.

The key is structuring the note with proper protections and making sure the total deal — cash plus note plus any other consideration — meets your objectives.

If you're evaluating a deal that includes seller financing and want help thinking through the structure, let's connect.