Seller Financing
The seller carries part of the purchase price as a note, and the buyer repays over time.
01
What It Means
In a seller-financed transaction, the seller accepts a promissory note for part of the price instead of receiving all cash at closing. The note specifies the amount, interest rate, term, payment schedule, collateral, and remedies on default.
Seller notes are common in small-business sales, both because business assets are harder to finance than real estate and because many lenders expect the seller to retain some exposure.
The note is usually secured by the business assets, sometimes by real estate, and often accompanied by a personal guaranty.
02
Why It Matters
It can be what makes a transaction possible. Bridging a gap between the buyer's available capital and the seller's price often closes deals that would otherwise fail.
It signals confidence. A seller willing to be repaid from future operations is telling buyers and lenders something about the durability of the earnings.
It carries real risk for the seller, whose return now depends on how the buyer operates a business the seller no longer controls. Terms, collateral, and guaranties are where that risk is managed.
03
Common Misconceptions
- "Seller financing is only for weak businesses." It is standard practice in small-business transactions.
- "The seller can simply take the business back if payments stop." Enforcement follows the security agreement and applicable law, and the business may be worth less by then.
- "A handshake on terms is enough." Rate, term, default remedies, and subordination all belong in signed documents.
- "Bank financing and a seller note are independent." A senior lender typically dictates subordination and payment standstill terms.
04
Questions to Ask
- What are the rate, term, amortization, and any balloon payment?
- What collateral and personal guaranties secure the note?
- How does the note subordinate to bank financing?
- What financial reporting will the buyer provide while the note is outstanding?
- What are the default remedies, and how would they realistically play out?
05
Related Reading & Resources
The most successful real estate decisions often involve collaboration between several professionals working toward the same goal. Understanding each person's role helps you ask better questions and make more confident decisions.
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Other Business Sale Terms
- Asset SaleThe buyer purchases specific business assets rather than the legal entity that owns them.
- Stock SaleThe buyer purchases the ownership interest in the entity, and the business continues intact.
- GoodwillThe intangible value of a business beyond its tangible assets — reputation, customers, and earning capacity.
- EBITDAEarnings before interest, taxes, depreciation, and amortization — a common starting point for valuing a business.
- Non-Compete AgreementA negotiated limit on the seller competing against the business they just sold.
- Letter of Intent (LOI)A preliminary outline of the key deal terms before definitive documents are drafted.
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