The short version
In seller financing the seller acts as the bank for part of the price. The buyer pays a down payment at closing. The rest becomes a note. The buyer pays that note back over time with interest.
Seller financing changes who provides one slice of the price. You provide that slice yourself. You accept a note instead of cash for that slice.
The note is a written promise to pay you. The note states four basic facts.
- The amount the buyer still owes you.
- The interest rate on that amount.
- The payment due each month.
- The date the balance must be paid in full.
You own the business until closing. At closing the buyer becomes the owner. You become a lender for the slice you financed. Your right to payment comes from the note itself. It does not come from still owning the business.
How a seller note actually works
Both sides agree on a price for the business. The buyer then sets aside cash for a down payment. That cash changes hands at closing.
The note covers the part of the price that stays unpaid. The interest rate is written into the note. The rate is your pay for waiting to receive your money.
The term is the number of years the buyer has to repay you. A term might run five years. The payment schedule might match the term.
The monthly payment is built from three numbers.
- The amount owed.
- The interest rate.
- The length of the payment schedule.
Part of each payment is interest. The rest reduces the amount owed.
Some notes end with one large final payment. That final payment is called a balloon. A balloon appears when the payment schedule runs longer than the term.
Payments usually begin soon after closing. Every amount and every date belongs in the signed paperwork.
Why sellers agree to it
Owners usually agree for one of three reasons.
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More buyers can afford the deal.
A buyer may run a business well and still lack the full price in cash. Your note can close that gap.
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It can support a better price.
A buyer who pays over time can often carry a higher total price. The higher price is not free money. You wait longer to receive it.
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Payments spread income over years.
The note pays you month after month. Interest adds to what you collect beyond the amount you financed.
Tax treatment is a question for your own CPA. This article does not give tax advice.
A worked example
The example below is illustrative only. Every figure in it is rounded.
Illustrative example only
This example has no balloon payment.
The buyer pays $240K in cash at closing. You finance the remaining $960K with a note. The note runs for five years at 8 percent interest. The buyer owes you about $19,500 each month.
Those payments repay the $960K you financed. They also pay you interest on top of the principal. The interest adds up to roughly $208K across the five years. At the end of the term the note is paid in full.
A different term or rate would change the monthly payment. Run your own numbers before you judge any offer.
The protections that matter
A note without protections is only a promise on paper. Four protections do most of the work.
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A real down payment.
The buyer pays real cash at closing. Cash at risk gives the buyer a strong reason to protect the business.
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A personal guarantee from the buyer.
The buyer signs the guarantee as a person. The debt then follows the buyer personally. It does not sit only inside the buying company.
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The business assets standing behind the note.
The assets of the business back your note. That claim is written into the closing paperwork.
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Paperwork drafted by your own attorney.
Your attorney drafts the note or reviews it line by line. Do not sign a note written only by the other side.
This section is general information only. It is not legal advice.
The honest risk
Seller financing makes you a creditor. A creditor does not control the business.
If the buyer runs the business well, the note gets paid. If the buyer fails, payments can stop. You would then rely on the protections inside the note. Recovery can be slow. Recovery can also be partial.
A large down payment means the buyer has more to lose. That is also why buyer quality matters more than the rate. A strong buyer at a fair rate beats a weak buyer at a high rate.
Money paid across five years is not the same as money in hand at closing. Only finance a buyer you would trust with the business itself.
FAQ
Is seller financing common in small business sales?
Yes. Most small deals include some portion financed by the seller. The share varies by deal. It often fills the space between a bank loan and the agreed price.
Can I charge interest?
Yes. The note carries a rate like any other loan. The rate is agreed before closing. It is written into the note itself.
What if the buyer stops paying?
The note governs what happens next. The remedies were written into the paperwork before closing. That is why the protections belong in the documents from the start.
Does RockHaven ask sellers to finance?
Sometimes. We raise it only where it fits the structure of a deal. We state it plainly in the offer. We never spring it late.