Seller notes close more deals and often produce higher total prices. Here's how seller financing works and how to protect yourself.
Jason Taken
HedgeStone Business Advisors
Seller financing — where you, the seller, accept a promissory note for a portion of the purchase price rather than cash at closing — is common in home service business sales. Approximately 60–70% of home service deals include some form of seller note. Done right, seller financing helps you close at a higher price. Done wrong, it's a loan you'll never collect.
SBA lenders typically require sellers to carry a note equal to 10–15% of the purchase price as a 'skin in the game' provision — it signals to the lender that the seller believes in the business's ability to continue performing. Beyond SBA requirements, seller notes help bridge price gaps. A buyer who can pay $1.8M cash might offer $2.1M with a $300K seller note because the note extends their buying power without requiring more bank financing.
Standard seller note terms in home service deals: principal amount: 10–20% of purchase price. Interest rate: 6–8% (fixed). Term: 5–7 years. Repayment: monthly principal and interest. Security: typically subordinate to the SBA loan (you're second in line). Standstill provision: SBA requires seller notes to have a standstill (no payments) for 24 months in many loan structures. Confirm this upfront so you know when payments actually start.
Seller note protections: (1) Personal guarantee from the buyer — if the business fails, the buyer is personally liable for the note. (2) Business assets as collateral, junior to SBA lien. (3) Life insurance on the buyer (key person coverage, payable to you in case of buyer death). (4) Cross-default provisions — if the buyer defaults on the SBA loan, your note is also in default. (5) Financial reporting requirements — the buyer must provide annual financials while the note is outstanding.
Not every buyer deserves a seller note. Warning signs: buyer has minimal net worth and the note is the only 'their money' in the deal. Business is declining and performance projections are aggressive. Buyer has no operational experience in your industry. The deal structure is 50%+ seller note (you're essentially financing the entire transaction). In these cases, insist on more cash at closing or walk away.
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