Seven Seller Financing Questions to Answer Before You Sign

Seller financing can make an acquisition possible when a conventional loan does not cover the entire price. It can also hide a mismatch between what the business earns and what the buyer must pay. Before you negotiate a rate or term, answer these seven questions in writing.

1. What cash is actually available for debt service?

Start with normalized cash flow, then subtract realistic owner compensation, taxes, working capital needs, maintenance spending, and the payments on every other loan. The remainder is the amount that could support a seller note. Test it against a weaker year, not just the most recent year.

2. Why is the seller willing to finance?

A seller who wants steady income and trusts the handoff may be a strong partner. A seller who cannot find a cash buyer may be signaling that the price, quality of earnings, or transfer risk deserves another look. Ask directly and verify the answer through diligence.

3. Which obligations have priority?

Map the order of payment and security interests. If a bank loan is involved, its lender may require the seller note to be subordinated. Understand what that means if the business misses a payment or needs new capital.

4. What happens if the handoff is slower than expected?

Customer retention, employee turnover, and vendor terms can all change after closing. Model a 10 to 20 percent revenue drop and a delayed transition. If a short dip immediately triggers default, the structure may be too fragile.

5. What support is the seller committing to provide?

Spell out introductions, training, access to records, and the length of the transition. Make responsibilities measurable. A vague promise to “help as needed” leaves both parties with different expectations.

6. Is the price being confused with the terms?

A lower down payment can make an inflated purchase price feel affordable. Compare the present value of all payments, including fees, interest, balloon payments, and contingent obligations. Negotiate price and financing as separate questions.

7. What does the exit from the note look like?

Know the maturity date, prepayment rights, refinance assumptions, and balloon amount. A financing plan that only works if rates fall or valuation rises is a bet, not a plan.

A good seller note aligns buyer and seller around a healthy business after closing. Put the answers in a one-page deal memo and have qualified legal and financial advisers review the documents. For more on structuring acquisitions, explore Creative Acquisitions.