Seller financing means you take part of the purchase price as a promissory note paid over time, which is to say you have sold the business and lent the buyer some of the money to buy it.
Why it exists
Because it closes deals. Many buyers of small businesses cannot fund the whole price, and a seller note bridges the gap. It also signals confidence: a seller unwilling to carry any of the price is telling the buyer something about their own faith in the numbers, and buyers read it that way.
What it costs you and what it buys
You usually get a higher headline price for accepting deferred payment, and you take on the risk that the buyer runs the business badly. Secure it: a personal guarantee, a lien on the assets, and the right to step back in on default. Keep the term short enough that you are not still collecting when you have long since moved on.
The tax point most sellers miss
Payment over more than one tax year changes when the gain is reported, and the allocation of the price across asset classes on IRS Form 8594 interacts with it. Both buyer and seller file that allocation and the two must agree, so this needs your accountant in the room before the purchase agreement is drafted, not after it is signed.
Questions people ask about seller financing business
What proportion is normally seller financed?
A minority of the price in most small-business deals, with the balance in cash at closing. The exact split is negotiated and depends on how the rest of the purchase is funded.
Is an earnout the same as seller financing?
No. A seller note is a fixed debt on a schedule; an earnout depends on how the business performs after you have left and stopped being able to influence it. The second is far riskier for a seller.
How do I secure a seller note?
A personal guarantee from the buyer, a lien over the assets sold and a right to step back in on default are the usual three. Keep the term short enough that you are not still collecting years after you have moved on.