Owner financing — also called a seller note — is when you, the seller, lend a portion of the purchase price to the buyer rather than receiving all cash at closing. Instead of getting $3 million at close, you might get $2.5 million and a promissory note for $500,000 payable over 3–5 years with interest.
Seller notes are common in HVAC business sales, particularly for smaller businesses or when buyers can't secure full conventional financing. Understanding when they make sense, what terms to expect, and how to protect yourself is critical knowledge before you sit across from a buyer.
When Seller Notes Are Common
- SBA-financed deals: SBA lenders often require a seller note equal to 10% of the purchase price on "full standby" during the SBA loan repayment period. This is a standard SBA requirement, not a negotiating position.
- Deals with individual buyers: Individual operators and search fund buyers often don't have sufficient capital for all-cash deals. A seller note bridges the gap and gets the deal done.
- Valuation gap situations: When buyer and seller disagree on value, a seller note can bridge the gap — you get paid if the business performs, reducing buyer risk.
- Tax deferral strategy: Installment sales allow you to defer capital gains recognition over the payment period. For sellers in high-income years, this can reduce the tax burden.
How to Protect Yourself on a Seller Note
A seller note is only valuable if you collect it. Here's how to structure seller notes to maximize your protection:
| Protection | What It Does | Negotiation Tip |
|---|---|---|
| Security interest in assets | If buyer defaults, you can take back the business assets | Always require this; accept no unsecured seller notes |
| Personal guarantee | Buyer's personal assets are at risk if they default, not just business assets | Standard for individual buyers; PE may resist |
| Life insurance assignment | If the key person (buyer) dies, insurance pays off the note | Common for notes over $500K; protects you from estate complications |
| Financial reporting requirements | Buyer must provide quarterly financials during note period | Lets you see early warning signs before a default |
| Cross-default provisions | If buyer defaults on any other major obligation, your note also accelerates | Require in the note documents; M&A attorney should draft this |
When to Say No to a Seller Note
Not all seller note requests are reasonable. Be especially cautious when: the buyer has limited operating history or management experience (higher risk of struggling to run the business); the seller note is a large % of the price (above 20–25%) with no clear equity cushion protecting you; the business has thin margins that would make debt service difficult; or the buyer is unwilling to provide a personal guarantee without a clear reason.
The bottom line: a seller note is a loan. You're now a lender. Think about it the same way a bank would — would you loan this person money to buy this business? If the answer is no, don't carry the note.
→ Back to: How to Sell Your HVAC Business (Complete Guide)Full overview of deal structure, taxes, and your exit options → Related: Taxes When Selling an HVAC BusinessInstallment sales and how seller notes affect your tax treatment → Related: HVAC Business Earnout Structures ExplainedAnother deferred payment structure — when earnouts vs. notes make sense
Know What You're Agreeing To Before You Carry a Note.
Owner financing can bridge a deal — or it can mean chasing a buyer for years who can't pay. Understanding when seller notes make sense and how to structure them is critical before you agree to one. Let's talk through your deal and whether carrying paper is worth it in your situation.
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