Seller Financing
Seller Financing Is Not a Compromise. It Is How Well-Structured Deals Close.
Here is what it means, what standard terms look like from both sides, and why many sellers end up preferring it to a conventional sale.
The Basics
What Seller Financing Actually Is
Seller financing means the seller accepts payment over time rather than a lump sum at close. Instead of the buyer paying the full purchase price at closing — which typically requires borrowing from a bank — you receive payments out of the business's ongoing cash flow. The seller holds a promissory note: a legal obligation by the buyer to pay the agreed principal and interest on the agreed schedule.
This is not an exotic structure. It has been used in business acquisitions for decades, across every sector, and at every price point. Many transactions that appear to be straightforward cash sales include some form of seller note at the structural level, sometimes called an earnout or a seller carry. The terminology varies; the mechanics are familiar to any experienced business attorney or accountant.
The Advantage
Why It Works Better Than a Bank Loan
A conventional bank loan to fund an acquisition is slow, uncertain, and conditional. The bank must approve the buyer, approve the business, and approve the deal terms — and any of those three decisions can stall or kill the transaction. The bank's interest is not in closing your deal. It is in protecting its own position.
Seller financing removes the bank from the middle. The transaction depends on two parties: the buyer and the seller. If both sides agree the business is worth a certain price and both are confident it will continue to generate the cash needed to service the payments, the deal can close without a credit committee. The timeline compresses. The number of parties with veto power over your exit decreases from three to one.
Risk
What the Seller's Risk Is
The seller's main risk is that the buyer does not perform. If the business does not generate enough cash to service the note, the seller may not get paid on schedule. This is a real risk, and it would be dishonest to minimize it.
Structure and security are what protect the seller. The note is secured by the business and its assets. If the buyer defaults, the seller has legal recourse to recover the business or its assets. The interest rate on the note is negotiated to reflect the risk the seller is carrying. And the buyer's demonstrated ability to operate is the seller's primary practical protection.
Sellers who know their business are most comfortable with this structure. They know the customers are loyal. They know the contracts are solid. They know the machinery will not fail next month. That confidence in what they built is what makes the structure workable.
Standard Terms
What Standard Terms Look Like
The following describes fair starting points for both sides. Specific deals vary based on business size, risk profile, and what both parties need.
Principal: The full purchase price, less any cash paid at close. In most deals, some portion is paid at close and the remainder is carried as the note.
Interest rate: Typically between five and eight percent annually, reflecting the risk the seller is carrying and current market rates. The seller should not accept a rate below what a comparable bank instrument would pay.
Term: Three to seven years is standard for lower middle market transactions. Shorter terms favor the seller; longer terms reduce the annual burden on the business's cash flow.
Repayment schedule: Monthly or quarterly payments are most common. Some deals include an interest-only period for the first one to three years, with full amortization thereafter. This structure helps the business manage cash during the transition period.
Security: The note should be secured by the assets of the business, giving the seller legal recourse if the buyer defaults. This is standard and should not be treated as a negotiating point — a seller who agrees to an unsecured note has significantly less protection.
Prepayment: Sellers generally prefer to allow prepayment without penalty. Buyers sometimes request penalty clauses; these are negotiable and generally not necessary in a well-structured deal.
Neither side should treat these as extremes to negotiate from. The goal is a deal that both sides can sustain, because a deal structure neither party can maintain is no deal at all.
Alignment
What This Structure Signals
Carrying a note is a statement of mutual confidence. The seller who agrees to carry a note is saying they believe the business will continue to perform and that they trust the buyer to run it. The buyer who accepts that structure is saying the same thing.
Seller financing aligns both parties around the same outcome. It is not a fallback when other options fail. It is the structure where the business keeps operating, keeps generating cash, and pays the seller what they were promised. Most bank-leveraged acquisitions do not produce that alignment — the bank wants its money, the buyer wants the return, and the seller wants the payment. Those interests are not always the same. In a seller-financed deal, they are.
The Full Picture
Where the Note Fits in the Full Process
The seller note is one component of a larger negotiation and contracting sequence. If you want to understand how the note fits into the full picture — what happens at each step from the first phone call to the signed closing documents, what representations you will be asked to make, how due diligence works, and what the closing documents actually contain — we have written a plain-language guide to the entire process.
If You Have Questions About This
The structure of seller financing is one of the first things we discuss in any serious conversation with a seller. If you have questions about how it would apply to your specific situation — the size of the business, your tax circumstances, what a reasonable interest rate looks like — we will address them directly.