Understanding Seller Financing: Why Buyers Ask for It and How It Works
The first time most founders encounter seller financing, it feels like a warning sign. They expected to receive cash for their business and instead face a request to defer payment, extend credit to the buyer, and accept risk on money they thought they were about to receive. The instinct is to question whether the buyer is creditworthy, whether the deal is properly valued, or whether something is wrong.
This instinct, while understandable, reflects unfamiliarity with market norms rather than identification of actual problems. Seller financing is standard practice in the vast majority of transactions. Understanding why buyers request it, what ranges are typical, and how to structure protective terms transforms seller financing from a source of anxiety into a deal tool that can benefit both parties.
The key insight is that seller financing's prevalence does not reflect buyer weakness. It reflects rational economics, information asymmetry, and financing constraints that characterise most M&A transactions. Founders who understand these dynamics negotiate better structures and close more deals than those who resist the concept entirely.
Why Seller Financing Is Everywhere
The all-cash business sale is largely a myth, particularly at smaller transaction sizes. According to Morgan and Westfield analysis, 60 to 80 per cent of small business sales include some form of seller financing. The statistic may surprise founders who imagine their exit as a straightforward exchange of shares for cash.
The prevalence reflects market structure rather than buyer deficiency. Bank lending for acquisitions is limited, particularly for smaller transactions where the fixed costs of underwriting exceed lender appetite. Private equity firms leverage their investments to enhance returns, but that leverage capacity often needs supplementation from other capital sources. Even strategic acquirers with significant resources frequently prefer structured payments that align seller incentives with post-closing performance.
Seller financing addresses information asymmetry that exists in every transaction. Buyers know less about the business than sellers. They cannot verify every customer relationship, every operational process, every risk factor. Seller financing signals that the seller believes the business will continue performing well enough to support the payments. Without that signal, many buyers would offer less or walk away entirely.
The economics are rational for both parties. Sellers receive higher headline prices when they provide financing because buyers can accept higher prices when capital efficiency improves. Buyers benefit from seller alignment with continued business success. Both parties have incentive to ensure the business performs well post-closing. The structure creates alignment that pure cash transactions lack.
What Buyers Are Really Asking
When a buyer requests seller financing, they are communicating several things, only one of which involves their capital position.
Financing constraints are the most straightforward explanation. A buyer may have conviction about the business and a strong plan for growth but lack the capital to fund the entire purchase price. Senior lenders impose limits on how much they will advance. Equity sources may be limited. Seller financing fills the gap, enabling a transaction that would otherwise not close. For sellers, this is often preferable to accepting a lower all-cash offer from a different, less suitable buyer.
Risk sharing reflects buyer concern about uncertainty. No amount of due diligence can fully verify every aspect of a business. Seller financing aligns seller incentives with post-closing reality. If problems emerge that the seller knew about or should have anticipated, the deferred consideration provides recourse. This protection makes buyers more willing to proceed at higher valuations than they might otherwise accept.
Transition alignment keeps sellers engaged post-closing. When a portion of proceeds depends on future performance, sellers have incentive to support the transition, make introductions, transfer knowledge effectively, and ensure smooth handoffs of customer relationships. Buyers value this alignment, particularly when the business depends on relationships or expertise that live in the founder's head.
Valuation bridging serves both parties when there is genuine disagreement about the business's prospects. If the seller believes the business is worth $20 million and the buyer believes $16 million is fair, a seller note for $4 million, payable over time with interest, bridges the gap. The seller gets their price if the business performs. The buyer limits downside if it does not. Both parties can proceed with a transaction that would otherwise fail.
Market-Standard Ranges
Understanding typical seller financing ranges helps founders evaluate whether a specific request is reasonable or excessive.
Analysis from Kimberly Advisors indicates that for middle-market businesses, deal structures usually include a seller note amounting to 10 to 30 per cent of the purchase price. This range provides useful benchmarks. A buyer asking for 15 per cent seller financing is within normal bounds. A buyer asking for 50 per cent is overreaching relative to market practice.
Axial analysis of 100 letters of intent provides additional granularity. Technology transactions show the highest median seller note at 21 per cent of deal value. This elevated percentage reflects the complexity of technology businesses, where buyer confidence in future performance depends heavily on factors that are difficult to verify during diligence. Seller financing provides protection against the risk that technology assets, customer relationships, or competitive dynamics prove different from expectations.
The same research found that smaller transactions tend to have higher seller note percentages compared to larger transactions. This pattern reflects financing constraints: smaller deals have less access to senior debt and other capital sources, requiring more seller participation to complete the capital structure. Founders of smaller businesses should expect higher seller financing requests as a structural reality.
Interest rates on seller notes typically range from 6 to 10 per cent, reflecting the subordinated position relative to senior debt and the counterparty risk inherent in lending to a newly acquired business. Note terms typically run from three to seven years, with longer terms reducing annual payment burden on the buyer but extending the period during which seller proceeds remain at risk.
Terms That Protect You
When seller financing makes sense for the transaction, founders should negotiate terms that protect their interests. The percentage of seller financing matters, but so do numerous other provisions that affect risk and collection probability.
Security interests protect sellers against buyer default. A seller note secured by the assets of the business, even if subordinated to senior lender interests, provides recourse if the buyer fails to pay. Unsecured notes leave sellers with only a general claim against the buyer, which may be worthless if the business fails or the buyer lacks other assets.
Subordination terms determine the seller's position relative to other creditors. Senior lenders typically require that seller notes be subordinated, meaning they get paid first if problems arise. Founders should understand exactly what subordination means for their note and negotiate limitations on additional debt that could further dilute their position.
Acceleration and default provisions specify what happens if the buyer breaches the note terms or the business fails to meet certain thresholds. Clear triggers and remedies protect sellers from situations where the buyer stops paying without consequence. Well-drafted notes include specific default definitions, cure periods, and seller remedies including acceleration of the full balance.
Personal guarantees from buyer principals provide additional security beyond the business assets. If the buyer is a newly formed acquisition vehicle with limited assets, a guarantee from individuals with resources provides meaningful protection. Founders should request personal guarantees whenever the buyer entity itself lacks substantial assets independent of the acquired business.
Payment schedules affect both risk and cash flow. Monthly payments provide regular evidence that the buyer is meeting obligations and create early warning signs if problems develop. Annual or bullet payments defer all risk to later dates when problems may have compounded. More frequent payment schedules are generally preferable for sellers.
Technology Sector Nuances
Technology businesses face elevated seller financing expectations that reflect sector-specific dynamics.
The Axial data showing technology's median seller note percentage of 21 per cent, higher than any other sector analysed, reflects several factors. Technology valuations tend to be higher relative to tangible assets, making traditional asset-based lending less applicable. Revenue recognition complexity creates uncertainty that buyers want protection against. Competitive dynamics can shift rapidly, making future performance less predictable than in more stable industries.
Technology founders should enter negotiations expecting seller financing as a standard component of transactions. Resisting the concept entirely limits the buyer universe and may prevent transactions from closing. Accepting the norm while negotiating protective terms is typically the more productive approach.
Customer concentration risk is particularly relevant in technology transactions. Businesses dependent on a small number of large customers face heightened buyer concern about concentration. Seller financing provides protection if key customer relationships deteriorate post-closing. Founders of concentrated businesses should anticipate higher seller financing requests and prepare explanations of customer relationship stability.
Intellectual property valuation uncertainty also drives seller financing in technology. Unlike physical assets that can be appraised and verified, intellectual property value depends on commercial application, competitive alternatives, and legal protections that are difficult to fully assess during diligence. Seller financing transfers some of this uncertainty back to the seller who presumably understands the IP value better than the buyer can verify.
Negotiating the Right Structure
Effective negotiation requires understanding what is standard, what is negotiable, and when to push back.
The percentage is negotiable within market ranges. A buyer asking for 25 per cent seller financing in a mid-market transaction is within bounds but at the higher end. Founders with competitive alternatives can push toward the lower end of the 10 to 30 per cent range. Those without alternatives have less leverage but can still negotiate within the range.
Interest rates should reflect the risk the seller is taking. Below-market rates represent an additional concession beyond the deferral itself. Founders should negotiate rates that compensate for the subordinated position and counterparty risk, typically in the 6 to 10 per cent range or higher depending on specific circumstances.
Security provisions are often negotiable even when subordination is required. A subordinated but secured position is better than an unsecured position. Founders should push for the strongest security interest the senior lender will permit, recognising that some security is better than none.
Term length affects present value significantly. A $5 million note paid over three years is worth more than the same note paid over seven years, even at the same interest rate. Shorter terms are preferable from the seller's perspective. Buyers may need longer terms to manage cash flow, but founders should negotiate the shortest term the buyer can reasonably accept.
Excessive seller financing requests warrant careful consideration. When a buyer asks for 40 or 50 per cent seller financing, something may be wrong. Either the buyer cannot obtain adequate financing from other sources, suggesting creditworthiness concerns, or they are attempting to shift disproportionate risk to the seller. Founders should investigate why the request exceeds market norms before accepting.
The goal is not to eliminate seller financing but to structure it appropriately. A well-structured seller note with proper security, reasonable term, market interest rate, and clear default provisions can bridge transactions that benefit both parties. The key is negotiating from knowledge rather than reacting from unfamiliarity.
If you are evaluating a transaction that includes seller financing and want to understand whether the terms are reasonable, we would be happy to discuss what market practice looks like and how to negotiate effectively.