By Wes Lewison · Changing Owners · ← All resources
Seller financing — also called owner financing or an installment sale — is when the seller carries part of the purchase price, letting the buyer pay it off over time with interest. It usually sits alongside other financing: a bank loan, an SBA loan, and the buyer’s cash injection. The terms mirror a typical bank loan — interest rate, repayment period, and foreclosure provisions in case of default.
Selling a business for more than its value creates capital gains. Assets held over a year get long-term rates, which are typically lower than the ordinary-income rates applied to short-term gains. In an asset sale, the purchase price is divided among asset classes to determine the gain on each.
When payments arrive over time, the IRS generally requires each payment to be split: part recovers the original cost of the assets, part is capital gain. Two caveats worth knowing: inventory doesn’t qualify for installment treatment (it’s ordinary business income), and if you claimed depreciation on equipment, depreciation recapture may apply at sale. These calculations get tedious — keep detailed records and structure the installment sale with your CPA.
Tax deferral: capital gains recognition spreads across the years you receive payments, letting you manage the liability. Potentially lower rates: spreading the gain may keep you out of a higher bracket than recognizing everything in the year of sale. A faster, easier sale: a seller note can bridge a financing gap and let a qualified buyer move quickly. Interest income: you earn interest on the balance while it’s outstanding.
There’s also a quieter benefit buyers notice: a seller willing to carry a note is signaling confidence in the business they built. That signal strengthens offers.
