Question 1

What is seller financing when buying a business?

Accepted Answer

Seller financing is when the seller becomes the bank. Instead of paying the full purchase price at closing, the buyer pays over time on a set schedule with interest. If you structure it right, it can be a win-win because the seller can often get a higher price and keep leverage.

Question 2

What are typical seller financing terms (down payment, interest rate, and term length)?

Accepted Answer

A common structure is 10–50% down, with the balance financed over 3–7 years at roughly 6–10% interest. For smaller sales, sellers often want a minimum 50% down. In middle-market deals, the seller note is usually 10–30% with a bank covering the rest.

Question 3

What needs to be in a seller financing contract to protect the seller?

Accepted Answer

You need specific payment language—exact dollar amounts, exact due dates, total number of payments, and whether payments apply to interest or principal first. Then you need collateral and a security agreement, plus default terms that spell out triggers, cure periods, and remedies. If you treat this like a handshake deal, you’re basically volunteering to get wrecked.

Question 4

How do sellers secure a seller-financed note (UCC-1, collateral, stock pledge)?

Accepted Answer

You take a security interest in the assets (asset sale) or a pledge of the stock (stock sale), and you file a UCC-1 financing statement in the buyer’s state. That filing makes your claim public and helps establish priority against other creditors. If you don’t file it, you’re unsecured, and that’s how sellers lose everything.

Question 5

Should a seller require a personal guarantee for seller financing?

Accepted Answer

If the buyer is purchasing through an LLC, I push for a personal guarantee. If the entity has no assets, good luck collecting when things go sideways. My view is simple: if you’re confident in the business, you’ll stand behind it—if you won’t, I’m not financing your purchase.

Question 6

What counts as default in a seller financing agreement?

Accepted Answer

Missed payments are obvious, but default should also include things like failure to maintain insurance, letting licenses lapse, or filing bankruptcy. I also like cross-default provisions so problems in other obligations trigger protections here too. And you need clear remedies: acceleration, repossession, and the buyer covering your legal fees.

Question 7

Is a seller note the same as an earnout?

Accepted Answer

No. A seller note is owed on a specific schedule regardless of performance, while an earnout depends on hitting targets. I’ve seen earnouts turn into multi-year legal battles, so if you can structure it as a note, do it.

Question 8

Is a balloon payment a good idea in seller financing?

Accepted Answer

I generally prefer full or partial amortization. Balloon payments look nice on paper, but if a buyer can’t make regular monthly payments, there’s no magic scenario where they produce a huge check in year five. Sometimes a longer term—even at a higher rate—reduces default risk because the monthly payment is actually doable.

Seller Financing Explained (Buy a Business With No Money Down)

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