How Does Seller Financing Work? Real Exit Strategies

What Seller Financing Actually Is

Seller financing is when you sell your business but the buyer pays you over time instead of handing you a check upfront. You become the bank. They give you a down payment, then make monthly or quarterly payments until the full purchase price is paid off.

I've done this on three of my five exits. It's not ideal-I'd rather have cash in hand-but it opens up your pool of potential buyers massively. Most people who want to buy a SaaS or agency don't have $500K sitting around, and banks won't lend on service businesses or early-stage software.

The alternative is waiting months or years for a cash buyer, or selling for 30-40% less to someone who'll only pay what they have liquid. Seller financing lets you get closer to your asking price by making the deal possible for more buyers.

This concept isn't unique to business sales. It's common in real estate when buyers can't qualify for traditional mortgages or when sellers want to attract more offers in a competitive market. The mechanics are the same whether you're selling a house or a SaaS - you're extending credit to the buyer and trusting them to pay you back while they take control of the asset.

How the Structure Works

Here's the basic framework I've used: the buyer puts down 20-40% of the purchase price upfront. That down payment proves they're serious and gives you some cash immediately. Then you agree on a payment schedule for the remaining balance-usually 2-5 years.

You charge interest, typically 6-10%. This isn't a gift. You're taking on risk by not getting paid immediately, so you should be compensated. The interest rate should reflect current market rates plus a premium for the risk of the buyer's business failing.

The payments are usually monthly, tied to the business's cash flow. If you're selling a business doing $50K/month in profit, the buyer might pay you $15K/month for three years. You want payments large enough that the deal closes in a reasonable timeframe, but small enough that the business can actually make them.

Everything gets documented in a promissory note-a legal contract that spells out the payment schedule, interest rate, what happens if they miss a payment, and what collateral secures the loan.

The Different Types of Seller Financing Structures

Not all seller financing deals look the same. I've used different structures depending on the buyer's situation and what made sense for both sides. Here are the main types you'll encounter:

Full seller financing is when you carry the entire purchase price minus the down payment. The buyer gets no bank loan - you're the only lender. This is what I've done most often because it's cleanest. One seller, one buyer, one payment schedule.

Partial seller financing combines a bank loan with seller financing. The buyer gets a traditional loan for maybe 50-60% of the purchase price, puts down 10-20%, and you carry a note for the remaining 20-30%. Banks sometimes prefer this because your subordinated note shows you have confidence in the business. I've avoided this structure because dealing with a bank's underwriting process defeats the whole purpose of seller financing.

Lease-to-own arrangements are technically different but operate similarly. The buyer leases the business with an option to purchase at the end of the lease term. A portion of each lease payment goes toward the eventual purchase price. I don't recommend this for businesses because it creates ambiguity about who's really in charge. With a proper seller financing deal, ownership transfers immediately and the buyer is fully committed.

Earnout structures tie part of the purchase price to future performance. You might get paid the full amount only if the business hits certain revenue or profit targets. I've only done this once and I hated it. Your payout depends on decisions you no longer control. The buyer can blame market conditions or their own incompetence for missing targets, and suddenly you're in arbitration fighting over whether they really tried their best.

Why Buyers Want This Deal

Banks don't understand internet businesses. I've tried to get SBA loans for acquisitions before and they just don't know how to underwrite a business with no physical assets, no inventory, and revenue from recurring software subscriptions or retainer clients.

For the buyer, seller financing means they can acquire a cash-flowing business with maybe $100K down instead of needing $500K liquid. They use the business's own profit to pay you off. If they're competent, they can even grow the business and pay you faster.

It also signals confidence from you as the seller. If you're willing to take payments over time, it suggests you believe the business is stable enough to keep generating cash. If you're demanding all cash upfront, buyers wonder what you know that they don't.

The other advantage for buyers is speed. Traditional bank financing can take 60-90 days with mountains of paperwork, appraisals, and underwriting. Seller financing can close in 2-3 weeks once you agree on terms. For a buyer who's watching a competitor eye the same acquisition target, that speed matters.

What You're Actually Risking

The biggest risk is the buyer runs the business into the ground and stops paying you. Now you have a promissory note for a worthless asset. You can technically take the business back, but if they've destroyed the client relationships or let the software break, there's nothing to take back.

This is why the down payment matters so much. If they put $150K down and then default after six months, you keep that $150K. It needs to be large enough that losing it would hurt them badly. Otherwise they have no skin in the game.

The other risk is opportunity cost. That money tied up in a promissory note could be invested elsewhere. If you took $500K cash, you could put it in index funds or start another business. Instead you're getting paid over three years, and if the buyer pays late or refinances, it could stretch even longer.

I mitigate this by being extremely picky about who I'll do seller financing for. I want to see that they've run something before-an agency, a SaaS, anything that shows they can manage cash flow and keep clients happy. If they're a first-time buyer, the down payment needs to be higher.

There's also the risk of the buyer taking out additional loans or liens against the business without telling you. I had this happen on my second exit. The buyer got a line of credit six months in and suddenly the business had two creditors. When cash got tight, he paid the bank first and me second. That's why you need a first lien position spelled out in your security agreement - you get paid before anyone else.

How to Structure the Collateral

You need security. The promissory note should include a lien on the business assets-the domain, the software code, the client contracts, everything. If they default, you can legally take it all back.

But here's the reality: taking a business back is messy. Clients have left, employees have quit, systems are broken. Legal collateral is important, but your real protection is choosing a buyer who can actually run the business.

I also like to stay involved for 60-90 days post-sale as a paid consultant. Not because I want to keep working on the business, but because it lets me see if the buyer is competent. If they're ignoring client emails or making insane decisions in month two, I know I need to watch the payments closely.

Some sellers also negotiate an earnout structure, where part of the purchase price is contingent on the business hitting revenue targets. I'm not a huge fan of this because it ties your payout to decisions you no longer control, but it can reduce risk if you're worried about the buyer's ability to maintain performance.

For collateral purposes, make sure you file a UCC-1 financing statement with your state. This is a public record that establishes your security interest in the business assets. If the buyer tries to sell assets or take out loans, other lenders will see that you have first claim. It costs maybe $50 to file and it's essential protection.

The Terms I Negotiate

Here's what I push for in any seller financing deal:

• 30-40% down minimum: Enough that they'll fight to avoid default.
• Interest at 8-10%: Market rate plus risk premium. Don't do 0% just to close the deal.
• 3-year maximum term: Five years is too long. Things change. I want to be paid off while the business fundamentals are still the same.
• Personal guarantee: The buyer personally guarantees the note, not just their LLC. If the business fails, they still owe you.
• Acceleration clause: If they miss two payments, the full balance becomes due immediately.
• First lien position: You get paid before any other creditors if things go bad.

I also negotiate for full transparency. They send me monthly financials so I can see if revenue is dropping before they start missing payments. Most buyers resist this, but if they won't show you the numbers, that tells you something.

Another term I've started including is a right of first refusal if they want to sell. If the buyer decides to flip the business a year later, I want the option to buy it back at the same terms before they sell to a stranger. This prevents scenarios where I'm stuck receiving payments from some third party I never vetted.

I also specify how prepayments work. Some buyers want to pay off the note early to eliminate the interest expense. That's fine with me - I'll even offer a small discount if they pay the full balance within the first 12 months. But spell out whether prepayments reduce the payment amount or shorten the payment term. I prefer they shorten the term so I get my money faster.

When Seller Financing Makes Sense

This works best when you're selling a stable, simple business. A SaaS with 90%+ retention and automated billing. An agency with long-term retainer clients and simple fulfillment. Something where the new owner just needs to not screw it up.

It's riskier if the business depends on you personally. If you're the main salesperson or all the clients hired you specifically, the business value drops the day you leave. Seller financing in that scenario means you're betting the buyer can rebuild what made the business work, which is a bad bet.

I also only do this when I don't need the cash immediately. If you're selling because you're burned out and want to start something new, waiting three years for payments is torture. But if you've already moved on to your next thing and this is just asset liquidation, the payment schedule is fine.

For buyers who are serious and capable but don't have a pile of cash, this is often the only way the deal happens. I've closed deals at higher multiples with seller financing than I would have gotten from a cash buyer, because I was solving a real problem for the buyer.

Seller financing also makes sense when you're selling in a down market. If interest rates are high or venture funding is tight, buyers have less cash available. Offering seller financing can be the difference between selling at a reasonable multiple versus waiting another year while the business declines.

How to Find Buyers Who Need Seller Financing

The buyers who benefit most from seller financing are operators, not investors. They're running agencies or small SaaS companies and they want to acquire a complementary business but don't have huge cash reserves.

I've found these buyers through business brokers, through marketplaces like Flippa, and through my own network. When you list a business for sale, explicitly mention that you're open to seller financing in the listing. You'll get more inquiries.

You can also proactively reach out to operators in adjacent markets. If you're selling a marketing agency, look for buyers who run complementary agencies and might want to expand their service offering. If you have a prospect list to build, a B2B database can help you identify potential buyers by filtering for companies in specific industries and revenue ranges.

The qualification process is critical. I run buyers through the same discovery framework I use for sales calls. What businesses have they operated before? Why do they want to buy this specific business? What's their plan for the first 90 days? How will they maintain revenue? Do they have the cash flow to make payments even if revenue dips 20%?

If they can't answer these questions with specifics, they're not ready. I've walked away from deals where the buyer had the down payment but couldn't articulate a clear plan. Selling to an incompetent buyer guarantees you'll end up in default proceedings 18 months later.

How This Connects to Your Exit Strategy

If you're building an agency or SaaS and think you might sell someday, you need to start preparing early. That means clean financials, documented processes, and a business that can run without you.

The stronger your systems, the less risk you take on with seller financing. If you've got everything documented and the buyer is essentially just monitoring dashboards and collecting money, they'd have to be truly incompetent to mess it up.

I built my exit playbook over multiple deals, and a lot of it comes down to making the business attractive to the widest range of buyers. That includes people who'll need seller financing. If you want the full breakdown of how to position your business for a sale, I put together the 7-Figure Agency Blueprint that covers this in detail.

Part of exit planning is also thinking about who your ideal buyer is. If you want a strategic acquirer who'll pay all cash, you need to build something that's valuable to a larger company. If you're okay with seller financing to an operator, you need to build something with predictable cash flow that can service debt payments.

The Paperwork You Actually Need

Don't do this with a handshake. You need a lawyer who specializes in business sales. Expect to spend $5K-$15K on legal fees, split between both sides or negotiated as part of the deal terms.

The core documents are:

• Asset Purchase Agreement: Defines what's being sold and for how much.
• Promissory Note: Lays out the payment terms, interest rate, and schedule.
• Security Agreement: Establishes your lien on the business assets.
• UCC Filing: Public record that you have a security interest in the assets.
• Personal Guarantee: Makes the buyer personally liable, not just their company.

You also want a transition services agreement if you're sticking around for 30-90 days to train them. Spell out exactly what you'll do and what you won't do, because scope creep on post-sale help is real.

One document people forget is an escrow agreement. If you're holding any money in escrow - like a reserve for warranty claims or disputed liabilities - you need a formal agreement that specifies when that money gets released. I've had buyers try to hold escrow money hostage over minor issues. A clear escrow agreement prevents that.

Also get a non-compete agreement. You don't want to sell your agency and then have the buyer claim you're competing with them when you start your next business. Define clearly what constitutes competition, for how long, and in what geographic area. Make it reasonable - courts won't enforce overly broad non-competes.

What Kills These Deals

The most common failure point is the buyer overestimating their ability to maintain the business. They think it's passive income, but then they realize they actually need to respond to customer support tickets, manage the team, fix technical issues, and keep selling.

Second most common is the buyer trying to "improve" things immediately. They rebrand, change pricing, fire key employees, rebuild the product. Revenue drops 30% in three months and suddenly they can't make payments. I always tell buyers: don't change anything major for six months. Just keep it running.

The third issue is personal life chaos. Divorce, health problems, partner disputes. Suddenly the buyer isn't focused on the business, payments get late, and you're chasing them down.

This is why I like buyers who already run something. They understand that owning a business means showing up even when you don't feel like it. First-time buyers often have unrealistic expectations.

I've also seen deals fail because of hidden liabilities that surface after closing. A client threatens to sue, a key employee quits and takes clients with them, or a software dependency breaks. That's why you need solid reps and warranties in the purchase agreement - the buyer has recourse if you misrepresented the business, but you're not on the hook for normal business risks.

How to Handle Late Payments

You will deal with late payments. Even good buyers miss deadlines occasionally. Have a clear process for this before it happens.

My process: if a payment is 5 days late, I send a friendly email reminder. If it's 10 days late, I call them directly to understand what's going on. If it's 15 days late, I send a formal notice invoking the late payment clause in the promissory note, which typically includes a late fee of 5-10%.

If they miss two consecutive payments, the acceleration clause kicks in and the full balance becomes due. At that point I'm talking to my lawyer about foreclosure proceedings.

But before you get to legal action, try to understand what's happening. If the business hit a rough patch but they're being transparent and have a plan to catch up, I'll sometimes work with them. If they're dodging calls and making excuses, that's when you get aggressive.

I had one buyer who missed a payment because a major client went bankrupt and didn't pay their invoice. He called me proactively, explained the situation, and asked if he could make a partial payment that month and catch up over the next two months. I agreed because he was communicating and had a plan. That deal ended up fine.

Compare that to another buyer who just stopped responding to emails when payments got tight. I had to threaten legal action to get his attention. Eventually I took the business back, but it had been neglected for months and I sold it for much less the second time around.

How I'd Do This Today

If I were selling another business tomorrow with seller financing, here's my exact structure: 35% down, 9% interest, 36-month term with monthly payments. Personal guarantee, full financial transparency, and I stay on for 60 days as a paid advisor.

I'd also negotiate that if they want to sell the business before paying me off, I get paid in full at closing. I don't want the business changing hands to some third party while I'm still carrying the note.

And I'd spend serious time vetting the buyer. Not just their experience, but how they think. Do they understand the unit economics? Can they explain the customer acquisition strategy back to me? Do they have a plan for their first 90 days? If they're vague or overly optimistic, I walk away.

The best deals I've done were with buyers who had already run businesses, understood exactly what they were buying, and viewed seller financing as a way to deploy capital efficiently rather than as a desperation move. Those people pay on time and often pay early.

If you're going through a sale process and trying to figure out how to structure conversations with potential buyers, the framework I use is in my Discovery Call Framework. Same principles apply whether you're selling to clients or selling your business-you need to qualify hard and understand what the other person actually wants.

The Tax Side You Can't Ignore

One advantage of seller financing from a tax perspective: you pay capital gains as you receive payments, not all in one year. If you took $500K cash upfront, you'd owe taxes on the full gain immediately. With seller financing, you spread that tax burden over several years.

This is called the installment sale method. You pay tax on the principal portion of each payment as you receive it. The interest you earn gets taxed as ordinary income annually, but the capital gains are deferred until you actually get the money.

This can keep you in a lower tax bracket across multiple years instead of spiking your income in one year. Talk to your accountant about whether this makes sense for your situation. It's one of the few upsides of waiting for your money.

There are some restrictions on installment sales. If you're selling to a related party - like a family member or a business you control - the IRS has special rules to prevent tax avoidance. And if the buyer assumes liabilities that exceed your basis in the business, you might have to recognize some gain immediately even with installment sale treatment.

Also be aware that if the buyer defaults and you take the business back, you have to recalculate your gain based on what you actually received. This can create a tax mess. Your accountant will need to file amended returns to reflect the foreclosure and adjust your capital gains.

Alternatives to Seller Financing

Before you commit to seller financing, consider whether there are better options. Sometimes there are ways to bridge the gap without you carrying the full note.

SBA loans can work for certain business sales, especially if the business has been around for several years and has tangible assets. The Small Business Administration guarantees loans for qualified buyers, which makes banks more willing to lend. The catch is the underwriting process is slow and the business needs to fit their criteria.

Earnouts let you get more cash upfront but tie part of the purchase price to future performance. I don't love earnouts, but they're better than carrying a huge note if you're worried about the buyer's ability to pay. At least with an earnout, if the business fails, you're not chasing payments - you just don't get the contingent portion.

Equity rollovers are when you take a stake in the acquiring company instead of cash. This only works if you're selling to a larger company that has equity value. I did this on one exit where I took 30% cash and 70% equity in the acquirer. That equity ended up being worth more than the cash, but it was a gamble.

Finder's fees or royalties are another structure where you get a percentage of future revenue instead of fixed payments. This aligns your interests with the buyer's - you both want revenue to grow. But it also means you never fully exit. I prefer clean breaks.

Red Flags That Should Kill the Deal

Some situations aren't worth the risk no matter how attractive the terms look. Here are the red flags that make me walk away:

The buyer won't provide personal financial statements. If they're asking you to carry a note, you deserve to know if they're personally solvent. If they refuse, they're hiding something.

The buyer wants to change everything immediately. If their plan is to fire your team, change the product, and pivot the business model, they're not buying your business - they're buying a customer list. That customer list will evaporate and so will your payments.

The buyer is pooling money from multiple investors. Now you have a group of people making decisions by committee, and when things go wrong, they'll point fingers at each other. I want one decision-maker who's personally on the hook.

The buyer is evasive about their background. If they can't clearly explain what they've done before and why they want this business, they're either lying or they haven't thought it through. Either way, bad news.

The buyer wants to use your down payment to fund operations. The down payment should come from their own capital. If they're planning to use it to pay expenses, they're undercapitalized and will run out of money quickly.

Final Thoughts on Seller Financing

Seller financing isn't the dream exit-cash is always better. But it's a tool that expands your options and can get you closer to your target multiple when the right buyer shows up without a checkbook. Just make sure you're protected, the buyer is competent, and you're not taking on more risk than the deal is worth.

The deals that work are the ones where both sides are aligned. You want to get paid, the buyer wants to build a valuable asset. If you pick a buyer who has the skills and the cash flow to succeed, seller financing is just a financial structure that makes the deal possible. If you pick wrong, it's a three-year nightmare of chasing payments and watching your business die.

Do your due diligence on the buyer, structure the terms to protect yourself, and get everything in writing. And if something feels off during negotiations, trust your gut and walk away. There will be other buyers.