How Seller Financing Works When You Sell a Business

A Seller Note Is a Loan You Make to Your Buyer

Seller financing means you take part of the sale price later instead of at closing. The buyer signs a promissory note promising to pay you that amount, plus interest, on a set schedule.

Say your company sells for $2.4 million. The buyer might bring cash, borrow most of the rest from a bank and owe you the last slice over several years. That last slice is the seller note.

Nothing about it is exotic. Most Main Street deals are paid for with some mix of buyer cash, an SBA loan and a seller note.

If you own a company doing $1M or more a year in sales, expect the topic to come up in nearly every serious offer.

Why Buyers Ask You to Carry Part of the Price

Some buyers ask because they are short on cash. More often the reason is trust. A buyer who sees you willing to wait for your money reads that as a sign you believe the business will keep performing without you.

Banks read it the same way. A lender looking at a deal with a seller note sees an owner with a reason to answer the phone and help during the handover, because their own payments depend on it.

There is a plain math reason too. A note closes the gap between what a bank will lend and what you are asking. Without it, the buyer may have to bring more cash than they have, or the price has to come down.

So when a buyer asks, it rarely means they are weak. It often means they are careful, and a careful buyer is usually the one who closes.

How a Seller Note Fits With an SBA Loan

Many buyers for companies in the Charlotte area use an SBA 7(a) loan, which can go up to $5 million according to the SBA.

The bank makes the loan and the SBA guarantees part of it, which is why lenders will finance a business purchase at all.

When your note sits in the same deal as an SBA loan, the bank comes first. Your note is subordinate, meaning the lender gets paid before you if the business struggles.

SBA rules can also ask for some or all of a seller note to go on standby, which means no payments to you for a set period.

The exact rules change from time to time, so your broker and the lender will confirm what applies when you sign.

The upside is that an SBA deal usually puts most of your money in your hands at closing. The note is the smaller piece.

If you are comparing that with other kinds of buyers, our guide on selling to private equity covers how those offers tend to be built.

The Terms You Will Actually Negotiate

A buyer's first offer will name a note amount. Everything else about it is open for discussion, and the details decide whether the note is a solid asset or a worry you carry for years.

• Interest rate. Usually set somewhere near what banks charge, sometimes a bit higher because your loan carries more risk than theirs.
• Term. How many years until you are paid in full. Shorter is safer for you. Longer lowers the buyer's monthly payment.
• Payment schedule. Monthly principal and interest is common. Watch for interest only periods or a large balloon at the end.
• Security. A lien on the business assets, a pledge of the company stock or both, so you have something to claim if payments stop.
• Personal guarantee. The buyer signs personally, not just through their new company, so their own assets stand behind the note.
• Standby terms. If a bank is involved, how long you wait and what happens to interest during that time.

Your attorney drafts or reviews the note and the security papers. Your broker keeps the business terms tied to the price, so a concession on one side gets something back on the other.

What Can Go Wrong for the Seller

The plain risk is that the buyer stops paying. A new owner can lose key staff, lose a big customer or simply run the company worse than you did. Your note depends on their skill now, not yours.

If you are behind an SBA lender, your claim is second in line. In a bad outcome the bank may take most of what is left before your note sees a dollar.

Collecting on a default is slow and costly. Taking back a company you sold, now run down, is a scenario most owners would rather never face.

Concentration makes all of this worse. If one or two customers carry the company, losing them after closing hits the buyer's cash flow and your payments together.

Our guide on customer concentration explains how buyers weigh that risk.

Ways to Protect the Money You Lend

You cannot remove the risk, but you can shrink it a lot before you sign anything.

1. Vet the buyer like a lender would. Ask about their credit, their cash, their management history and who will run the company day to day.
2. Keep the note a modest share of the price, so most of your money lands at closing.
3. Insist on a personal guarantee and a real security interest, and file the lien properly.
4. Ask for regular financial statements from the business while the note is open, so you see trouble early.
5. Add covenants that limit big new debt, owner payouts or a sale of the company without paying you off first.
6. Spell out default terms, late fees and your right to call the full balance due.

A strong transition plan also protects you. The better you hand over customers, vendors and staff, the more likely the business keeps earning the money that pays your note.

Why Some Financing Can Raise Your Total Price

Owners often see a seller note as a concession. It can work the other way. Offering to carry part of the price makes your company fundable for more buyers, and more buyers means more competition.

It also lets a buyer stretch. Someone who cannot quite reach your number in cash and bank debt might reach it with a few years to pay you the remainder. That is often the difference between your price and a lower one.

You also earn interest on the note, so the total you collect over time is higher than the face amount. Weigh that against the risk and the wait, and against what an all cash buyer would really pay.

The right answer depends on your company, your buyer pool and how soon you need the money. A valuation shows what the business supports, which tells you how much room you have.

Your CPA and Attorney Belong in This Early

How you are paid affects how you are taxed. Getting part of your price over several years may change when you owe tax on the gain. Ask your CPA how that works for your situation before you agree to terms.

Your attorney should read the note, the guarantee and the security agreement before the letter of intent turns into a purchase agreement. Our guide on the letter of intent shows where these terms first appear.

Want to know how much of a note your company could support, and at what price? Request a free, private valuation or call (704) 555-0187 to talk it through.