Seller financing.
What happens after the keys change hands?

The short answer

Selling the business can also mean becoming its lender.

Seller financing means the buyer pays part of the purchase price over time under a promissory note. You receive less cash at closing and keep exposure to the buyer’s ability to repay. The note’s face value is a contractual amount, not cash already available for retirement.

A seller note may help a transaction come together, but the financing decision needs its own review. Start with who owes you, what supports repayment, when you get paid, and what happens if the plan fails. Compare the note alongside likely sale proceeds and your household’s cash needs.

Note versus earnout

First, know what kind of promise you are accepting.

A note and an earnout can appear in the same deal. Neither should be added to spendable wealth without considering timing and risk. Use the deal-structure comparison to keep cash, notes, earnouts, and rollover equity separate.

A repayment example

Put the payment calendar beside your spending calendar.

Now test the year when a payment arrives late. Would you have to sell investments, postpone spending, or borrow? If a final balloon payment depends on refinancing, ask what happens when refinancing is unavailable. An attractive interest rate does not answer either question.

Terms to review

Review the borrower as carefully as the headline price.

• Borrower and guarantors: identify the legal obligor, its other debts, available financial information, and whether guarantees have substance.
• Collateral and priority: have counsel review the security, lien perfection, senior lender rights, and any standstill or subordination terms.
• Payment mechanics: spell out principal, interest, due dates, maturity, amortization, balloon amounts, and prepayment terms.
• Reporting and covenants: decide what information you receive and what changes require notice or consent.
• Offsets and disputes: understand whether the buyer can reduce or suspend note payments for an indemnity claim or other dispute.
• Default and remedies: ask counsel what enforcement could involve, including cost, delay, and the value of collateral under stress.

Put the note, purchase agreement, security documents, and senior financing terms in front of the same legal team. Reviewing one document in isolation can miss a restriction in another.

Tax timing

Payment timing and tax timing may differ.

An eligible installment sale can spread some gain recognition as payments are received. It does not make the entire payment tax-free: principal may include both basis recovery and gain, while interest is generally reported separately.

Inventory generally does not qualify for installment treatment, and depreciation recapture is generally recognized in the year of sale. Insufficient stated interest can also change the tax calculation. Ask your CPA to reconcile the asset allocation, basis, payment schedule, and cash needed for taxes. See IRS Publication 537, Installment Sales.

Entity type, assumed debt, related parties, large installment obligations, and state rules can change the analysis. Do not assume moving from New York before a payment arrives removes New York tax exposure. Use our New York–Florida planning guide to organize the questions for your tax team.

Your personal plan

Decide what must work without the note.

Separate capital already received from payments still owed. Build a household plan using cash at closing and other reliable resources, then test late or reduced collections. The point is to see how much your future spending still depends on the business you just sold.

1. Start with a supportable business value range.
2. Estimate what could remain after costs, debt, and taxes.
3. Compare it with what you need from a sale to retire.
4. Explore other exit paths if the proposed terms do not meet those needs.