Quick take
- A seller note is often about ten to twenty five percent of the price
- A lien on the business assets usually secures the note
- Seller financing widens the buyer pool and can close faster than an SBA loan
- Get an attorney to draft the note and the security terms
What a Seller Note Is
With seller financing, you accept part of the price over time instead of at closing. The buyer signs a note promising to pay you, usually with interest, over an agreed period.
In small deals, the rest of the price comes from the buyer's cash and often an SBA loan or other bank financing.
How Large the Note Is
A common range is about ten to twenty five percent of the price, though it varies by deal. A larger note means more of your money depends on the buyer succeeding.
Lenders may want a seller note, since it shows you believe the business will keep earning.
Securing the Note
A note is safer when it is secured. Sellers often take a lien on the business assets, recorded through a filing known as a UCC lien. If the buyer stops paying, the lien gives you a claim.
A bank lender may require its own claim to come first. Your attorney can negotiate how the two claims rank.
Why Buyers Want It
Seller financing widens the buyer pool. Some buyers cannot qualify for an SBA loan, and SBA loans often do not make sense for very small deals.
Lenders commonly limit debt to about three times adjusted cash flow, which means SBA buyers can often afford around four times or less. Higher prices need more cash from the buyer or a seller note.
Speed
A deal with seller financing can sometimes close in around six months, while an SBA deal may take nine to twelve. SBA deals are really two deals, between buyer and seller and between buyer and bank, and they have to close together.
Terms That Protect You
- A clear interest rate, payment schedule and final date
- A lien on business assets and, where fitting, a personal guarantee from the buyer
- Default terms that let you act if payments stop
- Limits on the buyer selling assets while the note is unpaid
- Insurance that names you as an interested party
Tax and Timing
Payments received over several years can spread the tax on the gain. See price allocation for how the split interacts with this.
Before you accept a note, read about buyer screening. A note is only as good as the buyer behind it.
This page is general information and not tax or legal advice. Have your attorney draft the documents.
Curious about your range? Get a free private valuation.