What is seller financing or a seller note in a business sale?

With seller financing, you don't collect the full price in cash at closing. Instead, the buyer pays a portion over time under a promissory note — the seller note — that spells out the principal, an interest rate, and a repayment schedule, typically over a few years. In effect, you become a lender to the buyer for that slice of the deal, and you collect principal plus interest on a defined timetable.

Sellers and buyers use it to bridge gaps. A seller note can close a valuation gap (you want more than the buyer can fund up front), fill the space between the buyer's equity and bank financing, and signal that you believe in the business's future. In SBA-backed acquisitions, lenders often require some seller financing — sometimes on 'standby,' meaning you can't collect until the bank loan is partly repaid. In private equity deals, buyers typically pay 60%-80% cash at close, with the remaining 20%-40% spread across seller notes, earnouts, and equity rollover.

The trade-off is risk. Because you're a lender, you only collect the deferred amount if the buyer keeps paying, and you are usually subordinated behind the senior bank or SBA loan — meaning they get paid first if things go wrong. Protect yourself by negotiating a meaningful down payment (cash at close), a fair interest rate, a personal guarantee, and a security interest in the business assets so you have recourse if the buyer defaults.

There is a tax angle too: structuring deferred proceeds as an installment sale can spread your gain across the years you actually receive payments rather than taxing it all in year one (IRS Topic No. 537), though depreciation recapture is generally taxed up front. Note that a seller note is different from an earnout — note payments are owed regardless of how the business performs, while an earnout is contingent on hitting targets. Have a CPA and M&A attorney paper the terms. DealSeam is not a traditional business broker; where there's a fit, it introduces owners to qualified buyers, and the buyer pays the success fee, so sellers pay nothing.