How does seller financing work when selling a business?

Seller financing means you agree to receive part of the purchase price in installments after closing rather than all upfront. You’re lending the buyer money to complete the purchase, and they pay you back over time with interest. It’s more common than most owners realize: according to Pepperdine Graziadio Business School’s 2023 Private Capital Markets Report, 48% of business sales that year involved some form of seller financing. Among deals in the $5 million to $50 million range, seller financing was present in 34% of transactions in 2023, up sharply from the 8% to 10% range seen in prior years.

Why seller financing comes up

Most buyers, especially first-time buyers of small to mid-size businesses, can’t get a bank loan that covers the full purchase price. Banks want collateral. A business’s value is often tied up in goodwill, relationships, and earning power, which isn’t tangible collateral the way a building is.

According to a 2024 BizBuySell survey, 61% of business buyers said they hoped seller financing would be included in a deal. Among brokers in the same survey, 32% called seller financing “very important” and another 20% called it “extremely important” to getting deals closed.

So buyers often piece together financing from multiple sources:

• Their own cash or equity
• A bank loan (often backed by an SBA guarantee)
• Seller financing to make up the difference

If you’re only willing to accept all cash at closing, you’re limiting yourself to buyers who have all the cash, which is a smaller pool.

A typical structure

There’s no single standard, but here’s a common arrangement for a $1 million business sale:

Component	Amount	Notes
Buyer cash at closing	$200,000	20% down
Bank / SBA loan	$600,000	60% of price
Seller note	$200,000	20% carried by seller
Total	$1,000,000

The seller note would typically come with:

• Interest rate of 6 to 8%
• Repayment period of 3 to 5 years
• Monthly or quarterly payments
• A promissory note and security agreement

In this example, at closing you receive $800,000. The remaining $200,000 comes to you over 3 to 5 years with interest.

The tax benefit of spreading out payments

One reason sellers sometimes prefer seller financing beyond just closing the deal: it can reduce the overall tax on the sale.

When you receive the purchase price in installments, the gain is recognized as you receive each payment rather than all at once in the year of sale. This is called an installment sale under IRS rules (specifically IRC Section 453). Each payment you receive contains three components: a return of your original cost basis, a pro-rata share of the capital gain, and interest income. Only the capital gain portion is taxed as a capital gain in each year you receive it.

If receiving all the proceeds in one year would push you into a higher bracket or trigger the 3.8% net investment income tax (which kicks in at $200,000 for single filers and $250,000 for married filers), spreading income across multiple years can mean meaningfully less total tax. Talk to your CPA about whether this applies to your situation before you agree to terms.

The risks you’re taking on

Seller financing isn’t free money. You’re becoming a lender, and that comes with risk.

Default risk: If the buyer can’t run the business as well as you did, or makes poor decisions, they may not be able to make your payments. If they default, recovering your money is difficult even if you have legal remedies.

Loss of clean break: You’re tied to the buyer and their performance for years. Some sellers find this stressful, especially if they’re counting on those payments for retirement.

Subordination to bank debt: If the buyer also has a bank loan, the bank’s debt usually takes priority over your seller note in a default scenario. You’d be paid after the bank is made whole.

How to protect yourself:

• Require a significant cash down payment (20%+ is typical minimum)
• Get a personal guarantee from the buyer, not just the business
• Secure the note against specific business assets
• Have your attorney draft the promissory note with strong default provisions
• Be careful lending to a buyer whose finances you don’t feel confident about

When to consider it and when to walk away

Seller financing often makes sense when:

• The business is solid and the buyer is strong, but they need a bridge to the full price
• You want to spread your tax hit across multiple years
• Your asking price is meaningfully above what the buyer can fund with cash and bank financing alone

It probably doesn’t make sense when:

• You need all the cash at closing (retirement, another investment, estate needs)
• The buyer’s financial track record is shaky
• You’re not willing to be emotionally tied to the business for the next few years

A good broker will help you evaluate buyers with seller financing in mind and structure terms that protect you.