Seller Financing

An arrangement in which the seller of a business agrees to accept part of the purchase price over time, typically as a promissory note subordinated to a bank loan.

Example

A seller carries a 40,000 note at 8% interest over five years, subordinated to the buyer's primary bank loan.

Important

A seller willing to carry a note has a financial stake in the business continuing to perform after they leave, which can be read as a signal of genuine confidence in the numbers.

Related terms

• Earn-Out — A portion of a purchase price paid contingent on the acquired business achieving agreed performance targets after closing, rather than paid in full at the time of sale.
• Debt service coverage ratio — Net operating income divided by the annual mortgage payments. Below 1.00 the asset does not pay for its own borrowing.
• Leverage — Investing with borrowed money so that you control more of an asset than your own capital would buy. Gains and losses are both multiplied by the same factor.

Lessons that explain it

• The return is discretionary earnings, financed with debt the business itself has to service — Seller's discretionary earnings is a reconstructed number built from add-backs, and almost every small-business purchase is financed with debt the business's own cash flow is expected to repay - which makes the add-back schedule the single most consequential piece of arithmetic in the deal. (12 min)

All 578 terms in the Investing glossary