Seller Financing
An arrangement where the seller of a business accepts a portion of the purchase price in installments over time, effectively acting as the lender to the buyer.
What is Seller Financing?
Seller financing (also called a seller note or vendor financing) means the seller agrees to receive part of the purchase price over time — typically over 3–7 years — rather than all at close.
Instead of the buyer obtaining 100% bank financing, the seller essentially becomes a lender for a portion of the deal.
Example: A business sells for $2M. The buyer pays $1.5M at close and $500K via a seller note at 6% interest over 5 years, paid monthly.
Why Buyers Want Seller Financing
- Reduces upfront capital needed
- Shows the seller has confidence in the business's future performance
- Easier to qualify for than 100% bank financing
- Aligns seller's incentives with a smooth transition
Why Sellers Accept It
- Can close deals that wouldn't otherwise happen
- Often commands a higher total sale price
- Interest income on the note
- Shows confidence and goodwill to buyers
The Risk for Sellers
If the buyer fails to perform and can't make payments, the seller may need to take the business back — or write off the balance. Mitigate this risk by:
- Running thorough buyer due diligence
- Securing the note with business assets
- Requiring a personal guarantee from the buyer
- Including acceleration clauses for default
Seller Note vs. Earnout
A seller note is a fixed obligation — the buyer owes a set amount regardless of how the business performs.
An earnout ties future payments to the business hitting performance targets. Earnouts are riskier for sellers because if the business underperforms (or if the buyer runs it differently), payments may not materialize.
How Much Seller Financing is Normal?
In SBA-financed deals, SBA rules typically require seller financing of 10% of the purchase price on standby (meaning payments are deferred for the first 2 years). Outside SBA, seller notes of 10–30% of the purchase price are common.