Seller Financing Contract: What You Need Before Exit

Why Seller Financing Contracts Matter for Your Exit

Most business owners think they'll sell their company for cash and walk away. Reality is different. I've done five SaaS exits, and seller financing showed up in three of them. It's not always the buyer's lack of capital-sometimes it's the smartest structure for both parties.

A seller financing contract is exactly what it sounds like: you become the bank. Instead of the buyer paying you the full purchase price upfront, they pay you over time with interest. You're financing their purchase of your business.

The benefits are real. You can command a higher purchase price because buyers will pay more when they don't need to hand over a massive check on day one. According to industry data, businesses that include seller financing sell for 20-30% more than all-cash deals. You spread your tax liability across multiple years instead of taking a huge hit in one tax year. And you maintain leverage-if the buyer stops paying, you can take the business back.

But here's the truth: if your contract is weak, you're screwed. I've seen sellers lose everything because they treated this like a handshake deal instead of a legally binding obligation with teeth.

Essential Components of a Seller Financing Contract

Every seller financing contract needs these elements, no exceptions. Miss one and you're opening yourself up to problems.

Purchase Price and Payment Structure

State the total purchase price clearly. Then break down exactly how payments work: how much down, how much monthly or quarterly, interest rate, and term length. The typical structure I see involves a down payment of 10-50% of the purchase price, with the balance financed over 3-7 years at interest rates ranging from 6-10%.

For business sales specifically, most small business sellers want a minimum 50% down payment for maximum security. For middle-market transactions, seller notes typically amount to 10-30% of the purchase price, with institutional financing covering the rest. The lower the down payment, the higher your risk.

Be specific about payment dates. Don't write "monthly payments"-write "payments of $15,000 due on the first business day of each month." Vague language creates disputes. Include the total number of payments, the exact payment amount (principal plus interest), and the final payment date.

Here's a critical detail most people miss: specify whether payments are applied to principal first or interest first. This affects how fast the principal balance decreases and how much total interest the buyer pays over the life of the note.

Security Interest and Collateral

This is where most sellers get lazy, and it costs them. You need a security interest in the business assets you just sold. If the buyer defaults, you can reclaim specific assets.

For asset sales, take a security interest in the purchased assets. For stock sales, get a pledge of the stock back to you. File a UCC-1 financing statement to perfect your security interest-this makes your claim public and legally enforceable against third parties.

The UCC-1 is your public notice that you have a lien on specific personal property. It establishes your priority position relative to other creditors. File it with the Secretary of State in the state where the debtor is located. For businesses, that's usually the state of incorporation. The filing typically lasts five years before you need to renew it.

I also negotiate personal guarantees from the buyer when possible. If they're buying through an LLC with no assets, that corporate veil won't help you collect. A personal guarantee gives you recourse against the individual. Some buyers resist this, claiming it defeats the purpose of their LLC structure. My response: if you're confident in the business, you'll stand behind it personally. If you won't, I'm not financing your purchase.

Default Terms and Remedies

Define exactly what constitutes default. Missed payment, obviously. But also include things like failure to maintain insurance, letting licenses lapse, or filing for bankruptcy. The more specific you are about what triggers default, the stronger your position when something goes wrong.

Include cross-default provisions if the buyer has other debt obligations. If they default on their bank loan, you want to know immediately, even if they're still paying you.

Then specify your remedies. Can you accelerate the full remaining balance? Can you take back the business? What's the cure period-how many days do they have to fix the default before you take action? Most contracts give buyers 10-30 days to cure a payment default, but you can make it shorter or longer depending on your risk tolerance.

I learned this the hard way on my second exit: always include a clause that the buyer pays your legal fees if you have to enforce the contract. Without it, you're spending your earnout money on lawyers. Make it clear that if you need to hire an attorney, file a lawsuit, or pursue foreclosure, all your costs-attorney fees, court costs, collection expenses-come out of the buyer's pocket.

Operational Covenants

You're not just a passive lender. Until you're paid in full, you have a vested interest in the business staying healthy. Include covenants that require the buyer to maintain certain operational standards.

Common ones: maintain minimum working capital levels (specify the exact dollar amount), keep key insurance policies active (list the specific types and minimum coverage amounts), not take on additional debt without your written approval, provide you with quarterly financial statements within 30 days of quarter-end, maintain all business licenses and permits in good standing, and not sell or transfer major assets without your consent.

These covenants give you early warning if things are going sideways. If you're getting financial statements quarterly, you'll see declining revenue or increasing expenses before they turn into missed payments. By then, you can have a conversation with the buyer about what's happening and potentially restructure before you're forced into default proceedings.

Specify consequences for violating operational covenants. Some sellers make covenant violations immediate defaults. Others give a cure period but require higher interest rates during the cure period. Figure out what works for your risk tolerance.

Structuring Terms That Protect You

The individual clauses matter, but so does the overall structure. Here's how I think about protecting myself in these deals.

Balloon Payments vs. Amortization

You have options on how the payments flow. Full amortization means equal payments over the term, like a traditional mortgage. Interest-only payments with a balloon means they pay you interest periodically, then one huge payment at the end.

I prefer full amortization or at least partial amortization. Balloon payments are great in theory-higher lump sum at the end-but they're collection nightmares. If the buyer can't make regular payments, how will they magically come up with $500K in year five?

The term of your note matters more than the interest rate for determining payment amounts. A 5-year note at 8% has dramatically higher monthly payments than a 7-year note at 10%. Run the numbers before you negotiate. Sometimes accepting a longer term at a higher rate gives you better cash flow and reduces default risk because the buyer can actually afford the payments.

If you do structure a balloon payment, make it reasonable. Don't have interest-only payments for five years with the entire principal due at the end. Instead, do partial amortization where they're paying down principal gradually, then a manageable balloon at the end that they can realistically refinance.

Subordination and Intercreditor Issues

If the buyer is getting bank financing too, the bank will want to be in first position. That means if things go bad, the bank gets paid before you do. This is called subordination, and you need to think hard before agreeing to it.

Banks often demand subordination as a condition of their loan. From their perspective, they're putting up the majority of the capital and want first priority on the collateral. From your perspective, subordination means you're taking a back seat if the buyer defaults.

If you do subordinate, negotiate caps on how much senior debt the buyer can take on. Otherwise they'll leverage up the business, take out all the cash, and leave you holding worthless collateral when they default. Include language in your subordination agreement that limits total senior debt to a specific dollar amount or a multiple of EBITDA.

Also negotiate what's called a "standby period" carefully. Many subordination agreements require you to go on "standby" for 90 days or longer if the senior lender declares default. During standby, you can't take any action to collect your debt even if the buyer stops paying you. Some standby provisions are reasonable, but watch out for ones that give the senior lender unlimited time to work out their loan while you sit helpless.

Earnout vs. Seller Note

These aren't the same thing, even though people confuse them. A seller note is a loan-they owe you the money regardless of business performance. An earnout is contingent-you get paid based on hitting revenue or profit targets.

Seller notes are cleaner and more predictable. The buyer owes you a specific amount on a specific schedule. You don't need to argue about whether revenue targets were hit or how expenses should be allocated. The debt exists independently of business performance.

Earnouts lead to disputes about how revenue is counted, what expenses are legitimate, and whether the buyer is sandbagging to avoid paying you. I've seen earnouts turn into three-year legal battles over whether a particular contract counted toward the revenue threshold or whether the buyer's salary increase was a legitimate business expense.

If you can structure it as a note instead of an earnout, do it. The only time earnouts make sense is when the business value truly depends on future performance that neither party can predict. Even then, make the earnout formula as mechanical and objective as possible. "Gross revenue as reported to the IRS" is better than "net profit as determined by the buyer's accountant."

Understanding Different Contract Structures

Not all seller financing arrangements use the same legal documents. The structure you choose affects your rights if things go wrong.

Promissory Note and Security Agreement

This is the cleanest structure for most business sales. The buyer signs a promissory note for the financed amount, and you take a security interest in specific collateral (the business assets, equipment, inventory, accounts receivable, intellectual property). You file a UCC-1 to perfect your security interest and establish priority.

If the buyer defaults, you have the right to repossess the collateral and sell it to recover your debt. The process is relatively straightforward and doesn't require court involvement in most states. You send a notice of default, wait for the cure period to expire, then exercise your remedies under the security agreement.

The promissory note should be paired with a security agreement that specifically describes the collateral and your rights in it. Generic language doesn't cut it. List exactly what assets secure the debt: "all equipment located at 123 Main Street including but not limited to..." with serial numbers if possible.

Stock Pledge Agreement

When you're selling stock rather than assets, a stock pledge gives you different protections. The buyer pledges the stock back to you as collateral for the note. If they default, you can foreclose on the stock and take back ownership of the company.

The advantage is that you reclaim the entire entity, not just individual assets. All contracts, customer relationships, and intellectual property remain intact. You don't need to rebuild-you just step back in as owner.

Include provisions that let you vote the pledged shares if certain defaults occur. This gives you control over major decisions even before you complete foreclosure. The buyer retains ownership and day-to-day control as long as they perform, but you have a kill switch if they don't.

Land Contract vs. Deed of Trust (Real Estate)

If real estate is part of your transaction, understand the difference between these structures. A land contract (also called contract for deed or installment sale agreement) means you retain legal title until the buyer pays in full. The buyer gets possession and equitable title, but you keep the deed.

If they default, you can typically reclaim the property through a relatively quick forfeiture process. Depending on your state, this might involve a 90-day notice and then recording a declaration of forfeiture. Much faster than foreclosure in most cases.

With a deed of trust or mortgage, you transfer legal title to the buyer immediately, and your security is a lien on the property. If they default, you need to foreclose, which involves more time and expense but may give you additional remedies like pursuing a deficiency judgment.

Which structure is better depends on your state's laws and your priorities. If you want maximum control and quick remedies, land contracts favor the seller. If the buyer needs to make improvements that require clear title, a deed of trust makes more sense. Talk to a real estate attorney in your state before deciding.

Red Flags That Signal a Bad Deal

Not every seller financing opportunity is worth taking. Here's when to walk away or renegotiate hard.

No down payment: If they can't put 20-30% down minimum, they're not serious or creditworthy enough to make payments. You're not a charity. A substantial down payment shows commitment and gives them skin in the game. Without it, they can walk away with minimal loss while you're stuck trying to reclaim a business they've run into the ground.

Buyer refuses personal guarantee: This tells you they're planning to default. If they believed in the business, they'd stand behind it personally. The whole point of forming an LLC is liability protection, but you're not a third-party tort claimant-you're the lender who made their purchase possible. If they won't personally guarantee the debt, they don't believe they'll pay it back.

Vague payment terms: "We'll figure out a payment schedule that works" is code for "we'll pay you when we feel like it." Everything must be in writing with specific dates and amounts. No handshake deals, no "we'll work it out later," no flexibility on the core payment obligations. You can be flexible on minor issues, but the payment terms should be crystal clear before you sign.

Buyer wants to change the business model immediately: If they're planning to pivot away from what made your business valuable, your collateral is about to become worthless. The contract should restrict major business model changes without your approval. If they want to take your profitable service business and turn it into a speculative software company, that fundamentally changes the risk profile of your loan.

Unrealistic revenue projections: When buyers show you projections that triple revenue in year one, run away. They're either delusional or lying to get you to accept unfavorable terms. Ask how they plan to achieve those numbers. If the answer is vague-"aggressive marketing" or "we have connections"-they don't have a real plan.

History of defaults or bankruptcies: Some buyers are serial entrepreneurs who have learned from past failures. Others are serial defaulters who leave a trail of unpaid debts. Know the difference. If they've declared bankruptcy twice in the past decade, you're unlikely to be the one they finally pay back.

Due Diligence You Can't Skip

Before you sign anything, investigate the buyer like they're investigating you. Run background checks. Pull credit reports. Check for bankruptcies and lawsuits. If they've defaulted on obligations before, they'll default on you.

Look at their operating history. Have they run businesses before? Did those businesses succeed or fail? How did they treat their obligations to vendors and employees? Call references-not the ones they give you, but people you find independently who worked with them.

Check court records in every jurisdiction where they've lived or done business. Lawsuits, judgments, tax liens, UCC filings against them-all of this tells you how they handle financial obligations. A single lawsuit doesn't disqualify someone, but a pattern of judgments and collections is a massive red flag.

If the buyer is a competitor or someone from your industry, that's usually good-they understand the business model. If it's a private equity firm or strategic acquirer, verify they have the capital reserves to handle a downturn. Ask to see proof of funds for the down payment before you take the business off the market.

For buyers who plan to keep growing the business, check their lead generation strategy. If they're planning to scale with outbound sales, they need solid prospect data. A lot of buyers talk about "aggressive growth" without having any systematic way to generate new customers. Access to quality B2B data matters if outbound is part of their plan, but you want to see they actually have a detailed strategy, not just vague ideas about "doing more marketing."

Verify their down payment source. Are they liquidating investments, borrowing from family, getting a bank loan, or using a home equity line? Each source tells you something about their financial stability and commitment. Money from liquidating investments shows they're serious. Borrowed money from multiple high-interest sources suggests they're scrambling and may not have the reserves to weather rough patches.

Tax Implications You Need to Understand

I'm not a tax advisor, so talk to your CPA before structuring anything. But here's what I've learned from my own exits.

Seller financing spreads your tax liability over multiple years using the installment method. Instead of paying capital gains tax on the full amount in year one, you pay tax as you receive payments. This can keep you in a lower tax bracket each year. For large exits, this is huge-the difference between paying 20% capital gains on $5 million in one year versus spreading it across five years can save you six figures in taxes.

The installment method calculates your gain on each payment based on the gross profit percentage. If you're selling for $1 million with a $400,000 basis, your gross profit is $600,000 (60% of the sales price). Every dollar you receive in principal payments is 60% taxable gain and 40% tax-free return of basis.

The interest you charge isn't just compensation-it's ordinary income taxed at your regular income tax rate, not the lower capital gains rate. Factor this in when setting your interest rate. If you're in the 35% tax bracket, an 8% interest rate nets you 5.2% after taxes. Make sure that's enough compensation for your risk.

If you're selling assets instead of stock, the allocation of purchase price matters. More allocated to goodwill (capital gains treatment) is better for you than allocation to equipment or inventory (ordinary income or depreciation recapture). Negotiate this allocation with the buyer before closing-it's in the purchase agreement, not something you decide later.

Imputed Interest Rules

The IRS requires you to charge a minimum interest rate on seller financing, called the Applicable Federal Rate (AFR). The IRS publishes these rates monthly, broken down by term: short-term (loans up to 3 years), mid-term (3-9 years), and long-term (over 9 years).

If you charge less than the AFR, the IRS will impute interest anyway and you'll owe tax on interest you never collected. Don't try to structure a zero-interest deal to make it more attractive to the buyer-it doesn't save anyone money and creates a tax mess for you.

The AFR is typically well below market rates for seller financing. As of recent IRS publications, long-term AFR rates have been in the 4-5% range, while most seller financing deals charge 6-10%. So you're usually well above the minimum unless you're trying to do something creative to avoid taxes (which doesn't work).

For business sales involving seller financing over certain thresholds, IRC Section 1274 and related provisions govern how the imputed interest rules apply. Generally, if your stated interest rate is at least equal to the AFR, you're safe. If it's below the AFR, the IRS will recharacterize part of your principal as interest, creating "original issue discount" that you must recognize as income over the life of the note.

What Happens When They Default

Defaults happen. I've had one buyer default on me, and it was a nightmare even with a solid contract. Here's what the process actually looks like.

First, send a formal notice of default citing the specific contract provision they violated. Don't call them up and have a friendly conversation about it-put it in writing. Send it certified mail, return receipt requested, so you have proof they received it. Give them the cure period stated in your contract (usually 10-30 days). Document everything in writing.

During the cure period, they might contact you asking for extensions or modifications. Be careful here. If you agree to accept late payments or extend deadlines without documenting it properly, you might waive your right to declare default later. Any modification should be in writing, signed by both parties, and explicitly state that it doesn't waive your rights to declare default if they miss future payments.

If they don't cure, you can accelerate the debt (demand full payment immediately) or foreclose on your collateral. Acceleration sounds good but it's usually pointless-if they can't make monthly payments, they definitely can't pay the full balance. But accelerating the debt is sometimes a necessary step before you can foreclose, depending on your contract language and state law.

Foreclosing means taking back control of the business assets. This requires legal process, usually including filing in court in some states or following the self-help remedies in your security agreement in other states. You'll need a lawyer, and this is expensive. Remember that clause about the buyer paying your legal fees? This is when it matters.

The foreclosure process varies dramatically by state and by the type of security you have. In some states, you can repossess personal property without going to court as long as you don't breach the peace. In others, you need a court order. For real estate, the requirements are much more formal-notice periods, publication requirements, sale procedures, potential redemption periods.

In my default situation, the buyer missed three payments in a row, I sent a notice of default, they didn't cure, I filed a lawsuit to accelerate the debt and foreclose on the security interest, we eventually settled before trial with them surrendering the business back to me and me agreeing not to pursue them personally for the deficiency. Total time: eight months. Total legal fees: $35,000, which I mostly collected from them because of my attorney fee clause.

The best outcome is often renegotiation. If the business is struggling but not dead, you might restructure payments, reduce the interest rate, or extend the term. You want to get paid, not run a business you already sold. Sometimes accepting $0.70 on the dollar over a longer period is better than spending two years in court fighting for $1.00 and ending up with $0.50.

State-Specific Considerations

Seller financing laws vary significantly by state. What's legal and enforceable in Texas might not work in California. Here are some critical state-specific issues.

Some states have strict foreclosure procedures that apply to seller financing. California, for example, has anti-deficiency laws that prevent you from collecting any shortfall after foreclosure in certain circumstances. If you foreclose and sell the collateral for less than the debt, you might not be able to pursue the buyer personally for the difference.

Other states have mandatory mediation requirements before you can foreclose. Some require you to offer loss mitigation alternatives. Some have long notice periods or redemption periods that delay your ability to retake the collateral.

Recording requirements vary too. Some states require you to record seller financing contracts in the public records. Others don't. Recording provides public notice and priority, but it also makes the terms of your deal public information that competitors or customers might see.

Usury laws differ by state. Most states have maximum interest rates you can charge on loans. If you exceed the usury limit, the entire loan might be unenforceable, or you might forfeit all the interest. Know your state's limits. Most usury laws have exceptions for commercial transactions or transactions over certain dollar thresholds, but don't assume you're exempt-verify it.

Some states treat seller financing for businesses differently than seller financing for real estate. The licensing requirements, disclosure obligations, and foreclosure procedures can be completely different depending on whether you're financing a business sale or a property sale. If real estate is part of your business sale, you might be subject to both sets of rules.

Protecting Yourself During the Life of the Loan

Once the deal closes and the buyer starts making payments, your job isn't done. Active monitoring protects your investment.

Set up a payment tracking system immediately. Use a third-party loan servicing company if the amounts justify it (usually loans over $250K). For smaller deals, create a spreadsheet that tracks every payment-date received, principal portion, interest portion, remaining balance. Send the buyer a statement after each payment showing their current balance and payment history.

Actually read the financial statements they send you. Don't just file them away. Look for declining revenue, increasing expenses, growing payables, or shrinking cash reserves. These are early warning signs that they might struggle to make future payments.

If you see problems developing, have a conversation early. Don't wait until they miss a payment. If revenue is down 30% year-over-year, call them and ask what's happening. Maybe it's a temporary blip, maybe it's a structural problem. Either way, you want to know before they're three months behind on payments and you're forced into default proceedings.

Visit the business periodically if possible. See the operation firsthand. Are they maintaining equipment? Do they have adequate inventory? Are employees still there or has turnover decimated the workforce? Your security is only as valuable as the underlying business, and you need to verify it's being maintained.

Stay on top of insurance. Require proof of insurance annually. If the building burns down or a key piece of equipment breaks and they're uninsured, your collateral value just disappeared. Most lenders require the seller to be named as additional insured and loss payee on all policies.

Watch for additional liens being filed against the business. Do regular UCC searches to see if other creditors are taking security interests. If the buyer is borrowing from multiple sources and pledging the same collateral to everyone, you have a problem. Your contract should prohibit additional liens without your consent, but buyers violate this provision all the time. Monitor it actively.

When to Use Seller Financing vs. Walking Away

Seller financing isn't appropriate for every deal. Here's when it makes sense and when to insist on cash only.

Use seller financing when you can't get your price in an all-cash deal. If buyers are offering you $3 million cash or $4 million with 50% seller financing, the financed deal might be worth the risk. You get a higher total price, you spread your taxes, and you keep leverage during the transition.

Use it when you're confident in the buyer and the business fundamentals. If the business has steady cash flow, low customer concentration, and a proven track record, and the buyer has relevant experience and solid financials, seller financing is relatively low risk. You're basically earning interest on a secured loan backed by a profitable business you built.

Use it when you want to stay partially involved. Some sellers like the ongoing connection that seller financing creates. You're not gone-you're a creditor with information rights and oversight. If you enjoy mentoring the new owner or staying connected to what you built, seller financing keeps you in the loop.

Don't use seller financing when you need the cash now. If you're retiring and need the proceeds to live on, or if you're using the sale proceeds to fund your next venture, don't finance the deal. The risk of default and delayed payment isn't worth it when you have immediate cash needs.

Don't use it when the business is declining. If revenue has been falling for three years, margins are compressing, and major customers are leaving, don't finance the buyer's acquisition of your struggling business. They'll almost certainly default, and you'll end up owning a failing business again.

Don't use it when the buyer has terrible credit or a history of failed businesses. Some buyers are bad risks no matter how attractive the deal looks. If their credit score is 500 and they've bankrupted two companies in the past five years, they're not suddenly going to become a responsible borrower for you.

Negotiating the Terms

The initial offer is just the starting point. Here's what to push for in negotiations.

Maximize the down payment. Start by asking for 40-50% down even if you'll accept 25-30%. Everything is negotiable, but start high. The more they put down, the less your risk.

Get the highest interest rate the market will bear. Don't accept the AFR or some arbitrary "fair" rate. This is a risky loan secured by business assets-you should earn a premium return. If the buyer balks at 10% interest, remind them they're getting seller financing because they can't get better terms elsewhere. If they could get a bank loan at 7%, they would.

Negotiate aggressive operational covenants. Require monthly financial statements, not quarterly. Require 30 days notice before any major decision-new hires over certain salary levels, capital expenditures over certain amounts, changes in business strategy. You want visibility and veto power over anything that affects your collateral value.

Include a provision that you can demand financial audits at your expense if you suspect problems. Most buyers will never trigger this, but having it in the contract gives you a tool if the financial statements look suspicious.

Negotiate what happens if they want to sell the business before paying you off. Do they need your consent? Does your note accelerate? Can they transfer the obligation to a new buyer? Spell this out. You don't want them selling to an unqualified buyer who immediately defaults, leaving you to chase someone you never agreed to finance.

Getting Help on Your Exit Strategy

Seller financing is just one piece of exit planning. The earlier you start preparing, the better your terms will be. I walk through the full exit preparation process in my 7-Figure Agency Blueprint, including how to make your business more attractive to buyers who can pay more upfront.

If you're actively negotiating a deal now, don't wing it. Get a lawyer who specializes in business transactions-this isn't the time for your general practice attorney who usually handles real estate closings. And bring in your CPA to model the tax implications before you agree to terms.

Your lawyer should draft the promissory note, security agreement, and UCC-1 filing. They should review the purchase agreement to make sure the seller financing terms integrate properly with the sale terms. They should research your state's foreclosure procedures so the remedies in your contract actually work if you need them.

Your CPA should model the installment sale tax treatment, calculate your gross profit percentage, project your annual tax liability, and compare the seller financing structure to alternative deal structures. Sometimes structuring part of the payment as a consulting agreement or non-compete payment creates better tax treatment than structuring everything as purchase price.

Consider hiring a business broker or M&A advisor if the deal is large enough to justify it. They can help you assess whether the buyer's offer is market-appropriate, whether the terms are reasonable compared to similar deals, and whether you're leaving money on the table. They've seen hundreds of deals and can spot problems you'd miss.

The contract protects you, but your due diligence determines whether you ever need those protections. Sell to the right buyer with proper structure, and seller financing can get you a higher valuation with tax benefits. Sell to the wrong buyer with a weak contract, and you'll spend years in court trying to collect money you'll never see.

Alternative Structures Worth Considering

Straight seller financing isn't your only option. Here are variations that might work better for your situation.

Seller Financing Plus Bank Loan

Many deals combine institutional financing with a seller note. The bank provides 60-70% of the purchase price, the buyer puts down 10-20%, and you finance 10-20% as a seller note subordinated to the bank. This reduces your exposure while still giving you upside from a higher purchase price.

The bank does most of the underwriting work for you. If the bank approves a $2 million loan, they've verified the buyer's creditworthiness and the business's ability to service debt. Your subordinated note is riskier than the bank's senior loan, but you're not taking all the risk yourself.

The downside is the subordination requirement. You're behind the bank in priority, and if the business fails, the bank gets paid first and you might get nothing. Negotiate carefully. Make sure you get financial statements and notice of any defaults to the senior lender. Some subordination agreements are reasonable, others give away all your rights.

Consulting Agreement Plus Small Note

Instead of financing 50% of the purchase price, consider structuring part of the payment as a consulting agreement. You get paid monthly to advise the new owner for 12-24 months, which gives you regular income and keeps you involved without taking the risk of a large note.

From a tax perspective, consulting payments are ordinary income, not capital gains. But they're more secure than a seller note-the buyer needs your help, so they're motivated to pay you. And if they stop paying, you can stop consulting without going through foreclosure.

This works best when your expertise is genuinely valuable to the transition. If the buyer needs you to maintain customer relationships or complete ongoing projects, a consulting agreement makes sense. If they're buying the business to run it completely differently, consulting is just a disguised seller note that creates worse tax treatment.

Earnout With Floor

If the business value genuinely depends on future performance, consider an earnout with a guaranteed floor. You get a minimum payment regardless of performance, plus additional payments if they hit targets.

This shares the risk and reward. If the business does well, you participate in the upside. If it struggles, you still get your floor payment. Structure the floor as a secured debt with the same protections as a seller note-promissory note, security interest, UCC filing. The earnout payments are additional consideration above the floor.

Make the earnout metrics objective and verifiable. Gross revenue as reported to the IRS is better than EBITDA as calculated by the buyer. Less room for disputes means higher probability you actually collect.

Final Thoughts

Seller financing done right is a powerful tool that gets deals done at higher valuations. Done wrong, it's a nightmare that consumes years of your life in legal battles while you collect pennies on the dollar.

The difference is in the details. You need a strong contract with specific remedies, thorough due diligence on the buyer, proper security interests filed correctly, and active monitoring during the life of the loan. You need professional help-a business attorney and a CPA who understand M&A transactions.

Don't agree to seller financing just because a buyer asks for it or because you're desperate to get a deal done. Make sure the economics work for you, the buyer is creditworthy, and the contract protects your interests. If those elements align, seller financing can be the best structure for your exit. If they don't, walk away and find a buyer who can pay cash.