Seller Finance Explained in Plain English

What seller finance really means

You agree to receive a slice of the price after completion instead of all upfront. The buyer signs a binding loan note or payment schedule and the business’s future cash flow covers the balance.

Three common structures

Vendor loan note

• Fixed repayments over 2 to 5 years
• Interest typically 6 %. 8 % per year
• Secured on shares or key assets

Deferred consideration

• Set instalments every 6 to 18 months
• No interest if paid on time
• Simple option when buyer expects quick cash bumps

Earn-out

• Part of price tied to profit or revenue targets
• Paid as a percentage of uplift above an agreed base
• Works when seller stays on to drive growth

Why owners choose seller finance

• Raises the headline price when buyers lack full cash today
• Spreads income, often lowering capital gains tax in the first year
• Earns interest above bank rates if structured as a loan note
• Keeps buyers accountable because you are still owed money

Key protections to build in

• First-charge security over shares until final payment lands
• Default interest that rises if a payment is late
• Personal guarantees for deals under £2 m where buyer is a new vehicle
• Information rights: monthly management accounts until the note is cleared

Quick numbers check

Sale price: £2 m
Upfront cash: £1.2 m (60 %)
Vendor loan note: £800 k over 4 years at 7 % interest

• Annual repayment: £200 k plus interest
• Total received: £2.14 m
• Extra £140 k earned by acting as the lender

Common pitfalls and fixes

Pitfall: vague interest or repayment terms
Fix: list exact dates, rates, and amounts in the loan note

Pitfall: buyer uses surplus cash for expansion before paying you
Fix: add a cash-sweep clause that diverts excess cash to repayments first

Pitfall: earn-out metrics outside your control
Fix: link targets to revenue from existing products or customers you still oversee

Quick self-check for owners

• Do you need every pound on day one, or can you wait for a higher total?
• Are you willing to leave a modest security interest on the business?
• Can the company’s cash flow comfortably cover the planned repayments?

Next step

Draft a one-page payment schedule with timeline, amounts, and security, then share it with your solicitor so it appears in the first heads of terms.