Seller financing when you sell a business: how a seller note works

How does seller financing work when you sell a business?

Seller financing means you accept part of the price after closing instead of all of it on the day. The buyer signs a promissory note, a written promise to repay a set amount with interest on set dates. That note is the seller note, and you become the lender for that slice of the price.

In the Q1 2026 Insight Report from the BizBuySell business-for-sale marketplace, as reported by the small business news site ASBN, 61% of buyers said they want seller financing in the deal, and more than half of brokers called it very or extremely important to closing.

The headline terms usually appear first in the letter of intent, so decide what you could accept before you sign one.

How much of the price do sellers finance?

In the Market Pulse survey for the second quarter of 2026 from the IBBA (International Business Brokers Association) and M&A Source, seller financing was between 6% and 11% of the price, depending on deal-size band:

Business value	Seller financing, share of price
Under $500K	11%
$500K to $1M	6%
$1M to $2M	7%
$2M to $5M	9%
$5M to $50M	6%

In every band, cash at close averaged 83% to 92% of the price. These are shares of the price, not of deals, and your own deal can sit well above or below them.

What terms go in a seller note?

A seller note is a loan, so it has the same parts as any loan.

Term	What it means
Interest rate	What the buyer pays you for waiting. For tax, the IRS expects at least a set test rate, covered below.
Length	How long until the note is paid in full. With a loan backed by the U.S. Small Business Administration (SBA) it can be long.
Payment shape	Equal monthly payments, or interest-only payments with the balance due at the end in one payment, called a balloon.
Security	A claim on the business's assets, filed publicly under the Uniform Commercial Code (a UCC filing), that gives you a right to them if the buyer defaults. With an SBA loan, the bank's claim ranks ahead of yours.
Personal guarantee	The buyer promises to pay from personal assets if the business can't.
Subordination	Your agreement that the bank is paid first and that you won't act against the buyer without the bank's consent.
Default terms	What counts as default, how long the buyer has to fix it, and what you can do then.

What changes if the buyer uses an SBA loan?

The SBA's 7(a) program is one way buyers pay for a business: a lender makes the loan and the SBA guarantees part of it. Its lender rulebook, SOP 50 10 8.1 (SOP stands for Standard Operating Procedure), took effect on October 1, 2026. For a buyer who is new to the business, it says:

• The buyer must put in at least 10% of the total project cost, meaning the price plus the other costs of getting the business operating, and that minimum can't be reduced.
• A seller note counts toward that 10% only on full standby. That means no payments of principal or interest for the whole term of the SBA loan, and the note must rank behind the lender.
• A seller note can cover at most half of the required 10%.
• Interest may build up, but nothing is paid. Standby interest can be added to the note and paid after the SBA loan is repaid.
• A loan to buy a business can run up to 10 years, longer only when real estate is part of the deal. A standby note can mean a long wait.
• Refinancing the note later. SBA allows seller debt from a change of ownership to be refinanced once it has been in place and current for 36 months. The rulebook's refinancing paragraph adds "not on standby", so ask the lender how that would apply to a standby note.

A note that is not on standby doesn't count toward the buyer's required equity, and the lender counts its payments when testing whether the business can afford all of its debt. The same rules prohibit seller earn-outs in these loans, and selling to a buyer with an SBA loan has the full picture.

An illustration: a $1,000,000 sale with a $50,000 note

This is an illustration with round numbers, not a typical deal. Assume the total project cost equals the price.

The buyer needs 10% in equity, $100,000. They put in $50,000 of their own cash. You carry a $50,000 note on full standby, the most the rule lets count. An SBA loan of $900,000 covers the rest. Before costs and taxes, you receive $950,000 at closing, and the note is the last 5%.

The ordinary note assumes 7% over five years of level monthly payments, chosen only to show the arithmetic.

Same $50,000 note	On full standby	An ordinary note
Payments to you while the SBA loan runs	None, for the loan's term (up to 10 years if no real estate is included)	About $990 a month for 5 years
Still owed to you after 2 years	$50,000 plus any interest that has built up	About $32,100
Paid in full	Some time after the SBA loan is repaid	After 5 years

What are the risks to you, and how do you reduce them?

You become a lender to the person now running your business. If its cash flow drops, your note may be paid late or not at all, and a bank lender may be paid first. These risks can be reduced, not removed. If the buyer uses an SBA loan, SBA's standby rules, written into the lender's standby agreement, will replace several of these points, such as the payment schedule and your claim on assets, so ask the lender for its standby form first. Before you agree to a note, work through this list:

• Know the buyer: industry experience, finances and references, checked with your broker.
• Keep the note small, or short.
• Take security and a personal guarantee, not only the company's promise.
• Define default, the time to fix it, and what you can do next.
• Make the note due if the buyer sells the business, and limit cash taken out while it is unpaid.
• Ask for monthly or quarterly financial figures until the note is paid.
• Have your lawyer write the note and any standby or subordination agreement.

How is a seller note taxed?

In general terms, and with your CPA deciding for your case:

• A sale with at least one payment after the year of sale is an installment sale. Unless you elect out, you report the gain as payments arrive, using Form 6252. Interest on the note is ordinary income each year.
• Under IRS Publication 537, the part of the gain that matches depreciation you already deducted on equipment or vehicles (depreciation recapture) is reported in the year of sale, even if no payment arrives that year. Inventory can't be reported as payments arrive.
• Minimum interest: if the note's interest is below the IRS test rate, part of the price can be treated as interest instead. The test rate comes from the IRS's applicable federal rates, published monthly in three bands, chosen by the note's weighted average maturity, roughly how long the principal stays unpaid on average (an equal-payment five-year note counts as shorter than five years). For October 2026 the annual rates are 4.25% (up to 3 years), 4.61% (over 3 up to 9) and 5.22% (over 9). The test uses the lower of two figures: the lowest rate in the three months ending with the month you sign a binding contract, or with the month of closing. Your CPA will confirm the figure for your dates.

Can you reduce how much of the price you finance?

How big a note you are asked to carry depends partly on what a lender will lend, which depends on earnings it can verify. Under the same SBA rules, any price above what the lender's valuation supports must be covered by equity, and a seller note used for that gap must be on full standby.

Your books were prepared for tax reporting, not for a sale. A buyer needs a clear view of what the business earns for its owner. Recasting presents the same records in the way buyers and lenders assess them. Under the SBA rules the lender must justify each add-back (an owner expense or one-off cost removed from earnings) in its own file, and unsupported adjustments do not count. Recast earnings, organized records and a business that relies less on you can give a lender more it can verify, though none of it guarantees a smaller note.

What to do next

Before you talk price with a buyer, decide three things: how much you could carry, for how long, and whether you could live with it sitting on standby for about ten years, or longer if real estate is part of the loan. Then ask your CPA how a note would change your tax in the year of sale, and ask your lawyer to review the terms before a letter of intent is signed.

The numbers come first. The documents buyers and lenders ask for is the practical place to start.

Keep reading

• Letter of intent to purchase a business: what's in it and what to negotiate
• What is an earn-out when you sell your business?
• Selling to a buyer with an SBA loan: what changes for you

This guide is general information, not tax, legal or valuation advice. Every business is different: talk to your accountant, lawyer and broker about yours.