A buyer wants to acquire your plumbing business but can't pay the full price in cash at close. They ask you to carry a portion of the purchase price as a "seller note" — essentially, you become the bank for part of the deal. This is called owner financing or a seller note, and it's more common than most owners realize.
Done right, a seller note can make deals happen that otherwise wouldn't and generate meaningful interest income. Done wrong, it's an unsecured loan to a buyer who has every reason to pay you last.
Why Buyers Ask for Seller Notes
There are two main reasons: financing gaps and risk transfer. A buyer using an SBA loan to purchase your business may need you to carry 10% of the deal as a seller note because the SBA structure requires it — the SBA lender wants to see seller confidence in the business's ability to service debt. In this case, the note is a feature of how deals get financed, not a sign of weakness.
The second reason is risk transfer. A buyer who asks for a large seller note (30%+) is essentially saying: "I'm not confident enough in this business to put all my own capital at risk." That should give you pause.
SBA Loans and the Standby Seller Note
SBA 7(a) loans are commonly used to finance plumbing business acquisitions. A standard SBA deal structure looks like: buyer equity (10%), SBA loan (80%), seller note on standby (10%). The "standby" means you can't receive payments on your seller note for the first 24 months — the SBA lender is paid first.
This is important to understand. Your $300K seller note might not generate a single payment for two years after close. Plan your personal finances accordingly.
How to Protect Yourself If You Carry a Note
| Protection | What It Means |
|---|---|
| Security interest | Your note is secured by the business assets — if buyer defaults, you have a claim on the collateral |
| Personal guarantee | Buyer signs personally — not just the acquisition entity — so you can pursue their personal assets on default |
| Life insurance assignment | Buyer assigns a life insurance policy to you as collateral in case of death |
| Financial reporting rights | Right to receive quarterly financials during the note term |
| Acceleration clause | Full balance becomes due immediately upon breach of any covenant |
| Subordination limits | Know exactly who is senior to you — typically the SBA lender — and what they can do without your consent |
When to Insist on Cash at Close
Not every deal requires you to carry a note. If you're in a competitive process with multiple qualified buyers, at least some of them should be able to pay full cash at close — especially if your business is $2M+ EBITDA. PE firms and strategic acquirers generally don't need seller financing.
Insist on cash at close when: buyer hasn't demonstrated they have access to capital; note would represent more than 20% of deal value without strong security; buyer's plan to run the business post-close seems thin; or you simply don't need the yield and don't want the credit exposure.
Seller Note Tax Treatment
If you carry a seller note, you qualify for installment sale treatment under IRC Section 453 — meaning you pay taxes on proceeds as you receive them rather than all in year one. This can reduce your tax burden significantly by spreading income over the note term.
The interest you receive is taxed as ordinary income. The principal portion is taxed at capital gains rates (same as if you'd received it at close). Work with your CPA to model the after-tax cash flow of an installment sale vs. a full cash close before accepting a note.
→ Taxes When Selling a Plumbing Business How installment sale treatment works on seller notes → How to Negotiate the Sale of Your Plumbing Business Where seller notes fit in the broader negotiationAlso in the Lightning Path Guide Series
Own a HVAC business? See our companion guide: Owner Financing When Selling an HVAC Business
DISCLAIMER: The information on this page is provided for general informational and educational purposes only. It does not constitute — and should not be construed as — financial advice, investment advice, legal advice, tax advice, or any other form of professional advice. Nothing on this site creates a professional advisory relationship between you and Lightning Path Partners. Business valuations, transaction structures, and market conditions discussed herein are general in nature and may not apply to your specific situation. Always consult a qualified financial advisor, M&A attorney, business broker, or CPA before making any business or financial decisions. Full Terms of Use →
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