What is seller finance?
Seller finance is a loan from the seller to the buyer. The two terms mean the same thing: "vendor finance" is common in Australia and the UK, "seller finance" in the US. The seller hands over the business today and accepts part of the price later, in instalments.
The loan is written up in a seller note (also called a vendor loan agreement). It sets out:
- Principal: how much of the price is deferred.
- Interest: the rate, if any, the buyer pays on the balance.
- Term: how long the buyer has to repay, often a few years.
- Schedule: monthly, quarterly, or with a grace period at the start.
- Security: what the seller can claim if payments stop. When there is also a bank loan, the seller’s claim usually ranks behind the lender’s.
How does seller finance work in practice?
In most deals, seller finance is one of three funding parts:
- Commercial debt (senior debt) from a lender, secured on the business.
- Seller finance, the deferred part of the price.
- Seller rollover, where the seller keeps a minority stake instead of cash. See seller rollover explained.
The mix varies. In a 70/20/10 structure, seller finance is 20%. In 100% vendor finance, it is the whole price.
Illustrative example
Illustrative only. A business is bought for $1.5M on a 70/20/10 structure:
| Funding part | Amount | How the seller is paid |
|---|---|---|
| Commercial debt | $1.05M | Cash at settlement, from the lender |
| Seller finance | $300k | Instalments over a few years from cash flow |
| Seller rollover | $150k | Keeps a 10% stake and shares in future profit and sale value |
If the seller note is $300k over three years, the buyer pays roughly $100k a year plus any agreed interest. The business’s cash profit must cover that and the bank repayments, with room to spare.
Why do sellers agree to vendor finance?
From the seller’s side, deferring part of the price can be attractive:
- A steady income after they leave. Many retiring owners prefer predictable payments to a lump sum.
- A higher or easier sale. Offering finance widens the pool of credible buyers.
- Tax timing. In some places, receiving the price over time can change when tax is paid. Sellers should check the rules in their state or country with their own adviser.
- Confidence. A seller who is willing to be paid from future profit is signalling that they believe in the business. Lenders notice.
In our experience, sellers say yes to vendor finance when they trust the buyer. An established operator in the same industry is far easier to trust than a first-time buyer. That’s one reason buying a competitor works so well.
Is seller finance safe for the buyer?
It is often safer than an all-bank deal, because the seller shares the risk. If the business underperforms, a seller who is still owed money has every reason to help fix it. But it is still debt. Protect yourself by:
- Testing the repayments. Total repayments (bank plus seller note) should leave a buffer. We work to a DSCR of around 1.5x. See DSCR explained.
- Negotiating the term. A longer term means smaller payments. A short grace period at the start helps during handover.
- Agreeing what happens if things go wrong. Default terms, cure periods and security should be clear and fair.
- Doing proper due diligence. Seller finance is not a reason to skip checks.
Is seller finance safe for the seller?
The seller’s risk is that the buyer stops paying. Sellers reduce that risk by choosing a buyer with an operating track record, taking security, asking for regular financial reporting and, often, keeping a rollover stake so they stay close to the business.
What are typical seller finance terms?
There’s no standard. Terms are negotiated deal by deal. Commonly, the note runs over a few years, and the interest rate reflects that the seller ranks behind the bank. Rather than copying a "typical" term, work backwards:
- Calculate the business’s reliable cash profit.
- Subtract the bank repayments.
- Check what is left at a sensible coverage ratio.
- Set the seller note term so it fits.
How is seller finance different from a bank loan?
| Bank loan (senior debt) | Seller finance | |
|---|---|---|
| Who lends | A commercial lender | The person selling the business |
| Ranking | Repaid first | Usually ranks behind the bank |
| Terms | Set by lender policy | Negotiated between buyer and seller |
| Flexibility | Limited | Grace periods, interest-free periods and stepped payments are possible |
| What the lender knows | Financial statements | The business inside out |
That last row matters. A seller who agrees to be paid from future profit is telling everyone, including your bank, that they believe the business can carry the debt.
What kills seller-finance deals?
- Asking for it too early. Earn trust first. Understand the seller’s goals before you raise structure.
- Framing it as a favour. Present it as what it is: an income stream secured by a business they know better than anyone.
- Unrealistic repayments. If the note only works in a record year, the seller’s adviser will spot it.
- Ignoring the lender. The bank must agree to the seller note and where it ranks.
How does G&L M&A Advisory use seller finance?
Josh Li, founder of G&L M&A Advisory, bought two of his own clinics with 100% vendor finance: no bank, no equity partner, with the owners paid from each clinic’s cash flow. Every structure the firm uses combines commercial debt, seller finance and seller rollover in the ratio that fits the seller.
For the full picture, read how to buy a business with no money down. If you own a $1M+ business, see if you qualify for an acquisition strategy call.