Seller Financing Explained: How to Structure a Note That Works for Both Sides

Seller financing is one of the most powerful — and misunderstood — tools in business acquisitions. In roughly 60-90% of small business sales, the seller carries some portion of the purchase price as a note. Yet most founders on both sides of the table don't know how to structure these deals properly, leaving money and protection on the table.

Whether you're a founder planning your exit or a buyer trying to close your first deal, understanding seller financing can be the difference between a deal that closes and one that dies in negotiations.

What Is Seller Financing, Exactly?

Seller financing (also called a "seller note" or "seller carry") means the seller acts as the lender for a portion of the purchase price. Instead of the buyer paying 100% at closing, the seller agrees to receive part of the payment over time — typically 3 to 7 years — with interest.

Here's a simple example:

• Purchase price: $1,200,000
• Buyer's down payment (cash + SBA loan): $900,000 (75%)
• Seller note: $300,000 (25%) at 6% interest over 5 years
• Monthly payment to seller: ~$5,800/month

The seller walks away from closing with $900K in hand and receives the remaining $300K plus ~$48,000 in interest over the next five years. The buyer gets into the deal with less cash required upfront.

Why Sellers Should Want to Offer Financing

Most sellers instinctively resist the idea. "I want all my money at closing." That's understandable, but here's why offering a seller note often increases your total payout:

1. You'll Attract More Buyers

The biggest constraint in small business M&A isn't finding businesses — it's finding buyers who can fund the full purchase price. By offering seller financing, you expand your buyer pool dramatically. More buyers means more competition, which means better terms on everything else: price, transition period, non-compete scope.

2. You'll Get a Higher Price

Data from BizBuySell and the IBBA consistently shows that businesses sold with seller financing achieve 10-15% higher sale prices than all-cash deals. Buyers will pay a premium for favorable terms. A $1M business sold all-cash might go for $900K, while the same business with 20% seller financing might sell for $1.05M.

3. Tax Advantages Through Installment Sales

When you receive payments over multiple years, you can use IRS installment sale treatment (Section 453) to spread capital gains across tax years. If your business sells for a $600K gain, taking it all in one year could push you into the 20% federal capital gains bracket plus the 3.8% Net Investment Income Tax. Spreading it over 5 years could keep you in the 15% bracket, saving you tens of thousands.

4. You Earn Interest

Seller notes typically carry interest rates between 5% and 8%. That's significantly better than a savings account or Treasury bonds, and it's secured by a business you know intimately. You understand the risks better than any bank would.

Why Buyers Love Seller Financing

Bridge the Funding Gap

Even with an SBA 7(a) loan covering 75-80% of the purchase price, buyers often struggle with the remaining equity. Seller financing fills that gap. A typical acquisition stack looks like:

• SBA 7(a) loan: 70-75% of purchase price
• Seller note: 15-20%
• Buyer equity (cash): 10-15%

This structure lets a buyer acquire a $1M business with as little as $100K-$150K in personal cash.

Skin in the Game = Smoother Transition

When the seller has money riding on the business's continued success, they're incentivized to help during the transition. They'll answer your calls on weekends. They'll introduce you properly to key clients. They'll actually train you instead of just going through the motions. This alignment of incentives is worth far more than the financing itself.

Signal of Confidence

A seller willing to carry a note is telling you: "I believe this business will continue to perform." If a seller refuses any financing, ask yourself why. Do they know something you don't? Seller financing functions as a form of due diligence signal.

How to Structure a Seller Note: The Key Terms

Every seller note should address these terms explicitly. Ambiguity here causes lawsuits later.

Principal Amount and Interest Rate

Market rates for seller notes in 2026 typically range from 5% to 8%, depending on risk and prevailing rates. The SBA requires seller notes to be on "full standby" (interest-only or no payments) for at least 24 months if an SBA loan is involved — meaning the seller won't receive principal payments for two years.

Term Length

Most seller notes run 3 to 7 years. Shorter terms benefit sellers; longer terms help buyer cash flow. A common compromise: 5-year term with a balloon payment, or 7-year amortization with a 5-year balloon.

Security and Collateral

The seller note is almost always subordinate to the senior lender (SBA or bank). This means if the business fails, the bank gets paid first. Sellers should secure their note with:

• A second lien on business assets
• Personal guarantee from the buyer
• A security agreement covering equipment, inventory, and receivables

Default Provisions

Define exactly what constitutes default: missed payments (after what grace period?), bankruptcy filing, breach of non-compete. Include acceleration clauses — if the buyer defaults, the full remaining balance becomes due immediately.

Prepayment Terms

Can the buyer pay off the note early? Most seller notes allow prepayment without penalty, but sellers can negotiate a prepayment premium (typically 1-3% of remaining balance) for the first 2-3 years to protect their expected interest income.

Real-World Deal Structure: A $2M Service Business

Let's walk through a realistic acquisition of a $2M commercial cleaning company doing $500K in annual SDE (seller's discretionary earnings):

Year 1-2 cash flow for the buyer:

• SDE: $500,000
• SBA debt service: ~$204,000/year
• Seller note (interest only during standby): ~$19,500/year
• Remaining cash flow: ~$276,500/year

Year 3+ (seller note fully amortizing):

• SBA debt service: ~$204,000
• Seller note P&I: ~$72,000/year (remaining 3-year amortization)
• Remaining cash flow: ~$224,000/year

The buyer still takes home $200K+ per year while paying down both loans. That's the power of a well-structured acquisition.

Common Mistakes to Avoid

For Sellers:

• Not securing the note properly. An unsecured seller note is basically a handshake. Always get a personal guarantee, a UCC filing, and a subordination agreement with the senior lender.
• Making the note too large. Carrying more than 20-30% of the purchase price concentrates your risk. If you're carrying 50%+, you're essentially still a partner in the business without any control.
• Ignoring the buyer's qualifications. You're becoming their lender. Review their credit, experience, and business plan just as a bank would.

For Buyers:

• Treating the seller note as free money. This is real debt with real consequences. Factor the full debt service into your cash flow projections from day one.
• Not negotiating standby terms. If you're using an SBA loan, the seller note must be on standby. But even without SBA, negotiating an interest-only period gives you breathing room during the critical first year of ownership.
• Skipping legal review. Both parties need independent attorneys reviewing the promissory note. The $2,000-$5,000 in legal fees is trivial compared to the cost of a poorly drafted note.

When Seller Financing Doesn't Make Sense

It's not always the right tool:

• Distressed sales: If the business is declining and the seller knows it, carrying a note adds risk for the seller and a sinking ship isn't going to generate the cash flow to service the debt.
• Seller needs all cash: Divorce settlements, health issues, or other pressing financial needs may require full cash at closing. That's legitimate.
• Buyer has unlimited capital: If a PE fund is paying all cash, there's no need for seller financing (though earn-outs serve a similar alignment function).

The Bottom Line

Seller financing isn't a consolation prize for deals that can't get bank funding. It's a strategic tool that helps sellers get higher prices, helps buyers close deals they otherwise couldn't, and aligns both parties' incentives for a successful transition.

If you're preparing to sell your business, build seller financing into your deal expectations from the start. If you're buying, understand that a reasonable seller note ask (15-25% of purchase price) is standard practice, not a red flag.

The best deals aren't zero-sum. They're structured so both sides win. Seller financing is often the mechanism that makes that possible.