Seller Financing in Business Acquisition

Seller financing — also called a seller note — is when the seller of a business agrees to finance a portion of the purchase price. Instead of receiving the full purchase price in cash at closing, the seller receives a portion over time, typically with interest. Seller financing is common in business acquisitions and can play several important roles in structuring a deal.

How Seller Financing Works

In a typical seller-financed acquisition, the buyer pays a portion of the purchase price in cash at closing (the down payment), finances a portion with a bank or SBA loan, and the seller finances the remaining portion. The seller note is a promissory note that specifies the amount, interest rate, repayment term, and payment schedule.

For example, a $1 million acquisition might be structured as: $150,000 buyer equity (15%), $750,000 SBA 7(a) loan (75%), and $100,000 seller note (10%). The seller receives $900,000 at closing and the remaining $100,000 over time.

When Seller Financing Makes Sense

• The buyer can't fully finance with traditional lending. Seller financing can bridge the gap between what the bank will lend and the total purchase price.
• The seller wants to make the deal happen. Offering financing can make the business more sellable, especially if traditional financing is difficult.
• The business's cash flow can support the seller note payments. The combined debt service (bank loan + seller note) must be sustainable.
• The seller is confident in the business's future. The seller is effectively betting on the buyer's ability to run the business and make payments.

How Seller Notes Are Typically Structured

• Term: Typically 3–7 years, shorter than bank loans.
• Interest rate: Varies, often comparable to or slightly above bank rates.
• Payment frequency: Monthly is most common.
• Subordination: Seller notes are typically subordinate to the primary bank loan — meaning the bank gets paid first if the business fails.
• Standby: In SBA transactions, the seller note may be placed on "standby," meaning no payments are made for a period (interest accrues), which improves the DSCR for the SBA loan.

Benefits of Seller Financing

• Reduces the cash the buyer needs at closing
• Can help the deal close when traditional financing falls short
• The seller has confidence in the business's future — they're invested in the buyer's success
• May offer more flexible terms than a bank

Risks and Considerations

• The seller note payments add to the business's total debt service — the combined payments must be sustainable
• If the business struggles, the buyer is still obligated to pay the seller note
• Seller notes are typically unsecured or subordinate — if the business fails, the seller may not recover the full amount
• In SBA transactions, the seller note must meet SBA standby requirements, which can complicate the structure

Next Step

If you're planning a business acquisition and want to understand how seller financing might fit into your structure, submit your information for a review, or read our comprehensive business acquisition financing guide.