By: Souza Roy & Ridgell
Seller financing, also known as owner financing, is an alternative type of business or real estate transaction where the seller acts as a financial institution by extending credit to the buyer compared to the buyer obtaining a loan or mortgage from a traditional financial institution. Done properly, it can be used as a bridge tool to help close a transaction but as a private arrangement, the buyer and seller must agree on the loan terms, from the purchase price to the payment schedule and have fewer legal protections than traditional transaction.
Souza Roy & Ridgell recently assisted with the sale of a business and part of the price was not paid fully in cash at closing. Instead, the seller financed $100,000 through a promissory note, while the rest of the purchase price was paid at closing. The note was backed by a security agreement covering the purchased assets, the buyer’s assets, and it was also supported by a personal guaranty from the buyer’s principal.
Seller financing is complicated and comes with its own set of risks and costs. These are several lessons to take into a seller financed transaction.
1. Seller financing can help a deal get across the finish line
One practical use of seller financing is that it can reduce the amount of cash the buyer must bring to closing. Here, the documents reflect cash at closing plus a seller note, rather than all-cash payment.
Key takeaways are:
• It can make a transaction more achievable for a buyer.
• It can help preserve deal value for the seller when full cash at closing is not the only workable option.
• It may help bridge a valuation or liquidity gap between the parties.
2. Security matters
In this matter, the note was to be secured by the purchased assets and all assets of the purchaser.
The security documents also show ongoing protections tied to the collateral, including restrictions on transfer, lien issues and the lender’s ability to perfect and maintain its security interest.
The key lessons for both parties here are:
• If you are financing part of the purchase price, think carefully about what collateral secures repayment.
• If you are the buyer, understand that seller financing may come with continuing limits on your ability to transfer or encumber assets without consent.
3. A personal guaranty can be a major protection for the seller
The transaction documents provide that the note will be guaranteed by a member of the purchasing company.
From a practical standpoint:
• For a seller, a guaranty can provide another source of recovery if the buyer entity does not pay.
• For a buyer, a guaranty is a serious personal obligation and should be understood as such.
The guaranty materials in the file also reflect broad enforcement language and default-related provisions, underscoring that this was intended to be meaningful credit support, not just symbolic comfort.
4. Terms of the note affect business risk
The LOI states the note had a one-year term, 3.5% interest, and allowed prepayment without penalty.
The important takeaway is not just the rate itself, but that parties should focus on:
• Interest rate.
• Maturity date.
• Whether there is a balloon payment.
• Whether prepayment is allowed without penalty.
• What happens on default.
5. The seller should not treat it as an informal IOU
The records show that the seller-financed piece was documented with multiple layers:
• A promissory note.
• A security agreement.
• A guaranty from the buyer’s principal.
Proper documentation is a crucial part of the stability of the transaction. The promissory note, agreement and guaranty ensure the transaction can be legally binding and protects both parties.
6. Default provisions are not just boilerplate
The promissory note and guaranty documents include remedies and default-related provisions, including collection costs and attorneys’ fees, lender remedies, and default triggers tied to payment failures, covenant breaches, inaccurate statements, other indebtedness defaults, and insolvency-related events.
For buyers and sellers, that means:
• Sellers should understand how default is defined and what remedies they have.
• Buyers should understand that missing payments can trigger much broader consequences than just owing the missed installment.
By including proper default provisions, it adds another layer of security for the seller in the transaction and shapes their options for recourse and remedies. Default provisions are the cornerstone of the long-term viability for both the buyer and seller; both parties should understand the full scope of the consequences of defaulting prior to closing a transaction.
7. Parties should be clear about what the buyer is and is not assuming
The documents state that the purchaser would not assume the seller’s liabilities, except as otherwise specifically addressed.
When seller financing is part of an asset sale, this matters because:
• The seller may still retain pre-closing liabilities.
• The buyer may be acquiring assets but not old debts.
• The seller-financed note should be viewed separately from whether liabilities are assumed.
Successor liabilities are a real issue in transactions like this one and clearly defining and understanding what is being acquired is important for both the buyer and seller to avoid damaging claims further down the line.
8. Transition obligations can still matter even where seller financing exists
The documents show other negotiated obligations around the closing period, including confidentiality, restrictive covenants, employee-related issues, and reimbursement for prorated employee healthcare costs after closing.
That means seller financing is not just a payment concept. It often exists alongside operational transition obligations that affect how workable the handoff will be.
9. Seller financing often interacts with the rest of the deal structure
This was not just “cash plus note.” The transaction also involved:
• An inventory purchase price to be paid in cash at closing
• Accounts receivable adjustments
• Bank payoff coordination reflected in the closing agenda
• A separate lease arrangement for the business premises
• Post-closing filings including a UCC financing statement
Seller financing transactions need to account for the full scope of the assets involved with the deal and be structured and adjusted accordingly.
Seller financing can be an effective tool for getting a deal across the finish line but presents a new set of risks for both buyers and sellers. When used thoughtfully, seller financing can bridge a gap between buyer and seller while preserving deal momentum, provided the parties clearly address repayment terms, collateral, default remedies, and the overall transaction structure but done incorrectly can be damaging for all parties involved. By implementing the lessons here, it lays the groundwork for successful seller-financed transactions going forward.
The information in this notification should not be taken as formal legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.
Souza Roy are business attorneys in Annapolis whose practice focuses on corporate, estate planning, real estate, and contract strategy. www.souzalaw.com.
