A lot of business sales do not close with an all-cash check at the table. The buyer pays part now and signs a note for the rest. That is seller financing, and it can be a smart way to get a deal done. It can also leave you exposed if you do not structure it carefully.
I have drafted and reviewed these notes for business owners on both sides of the table. The deals that go well share a few common features. Here is what I tell clients who are thinking about carrying paper on a sale.
1. Get real collateral, not just a promise
A promissory note is only as good as what stands behind it. I want my seller clients secured by the assets of the business itself, and often by a personal guarantee from the buyer individually.
If the buyer is buying stock or membership interests rather than assets, we can also use a pledge of that equity as collateral. If the buyer stops paying, you want the right to take the business back, not just a lawsuit.
2. Control the risk of the buyer running the business into the ground
You are not just betting on the buyer paying. You are betting on the business continuing to generate enough cash to pay you. That means the note needs covenants.
I typically build in restrictions on additional debt, limits on owner distributions until the note is paid down, and financial reporting requirements so you can see problems early. Silence in the note is not neutral. It favors the buyer.
3. Negotiate your remedies before you need them
Default provisions matter more than most sellers realize until they need them. What counts as a default. How much notice and cure period the buyer gets. Whether missing one payment accelerates the entire balance.
I also want clear language on what happens if the buyer tries to resell the business before the note is paid off. Your consent, or at least your right to be paid off at closing of any resale, should be spelled out.
4. Think about tax treatment early, not after closing
Seller financing often means you are receiving payments over multiple years instead of a lump sum. That can trigger installment sale treatment under the tax code, which spreads gain recognition over the payment period.
That can be a benefit or a complication depending on your overall tax picture. It needs to be modeled before you agree to terms, not discovered after the return is filed.
5. Decide what happens if the deal was structured as an asset sale versus a stock sale
The form of the underlying transaction changes how the note interacts with purchase price allocation, depreciation recapture, and your priority relative to other creditors of the business.
A seller note in an asset deal typically sits behind the buyer's bank financing unless you negotiate otherwise. Know where you stand in line before you sign.
Seller financing can bridge a valuation gap and get a deal closed that otherwise would not happen. But you are extending credit to someone who is about to run your former business, often with money that is not yet in your hands. If you are structuring a sale with a seller note, reach out through blgattorney.com or call my Oklahoma City office before you agree to terms, so the paperwork actually protects you.