What am I agreeing to when the seller of a business carries part of the price?

Written by Kaz · Published 27 September 2026 · How figures are checked

Summary

You are signing a loan, and the seller is the lender. The IRS treats the deal as an installment sale, a note with too little stated interest gets interest read into it for tax purposes, and both of you report how the price splits across the assets. If an SBA 7(a) lender is funding the rest, expect the seller to sign a standby agreement that puts the note behind the bank.

The note is ordinary debt with a friendly lender

IRS Publication 537 defines an installment sale as "a sale of property where you receive at least one payment after the tax year of the sale." From the buyer's side, the promise to pay can be a note, a mortgage, a deed of trust, or a land contract. The seller's good intentions do not change what the paper is: a missed payment is a default on a loan, and the note will say what the seller can do about it.

A handshake on "no interest" does not hold up well. When the agreement "doesn't provide for enough stated interest," the IRS says part of each later payment may have to be treated as interest, even if the contract never calls it that. That reclassified amount cuts both ways. For the seller it reduces the stated selling price and becomes interest income; for the buyer it reduces the basis in the assets and becomes interest expense. A zero-interest note, in other words, does not mean a zero-interest deal on either tax return.

Where a balloon hides

Seller notes are sometimes priced on a long schedule and cut off early. Take a $300,000 note at 7%, with payments figured over 10 years: about $3,483 a month. Make it due in five years and the buyer has paid roughly $209,000 by the maturity date and still owes about $175,900 in one lump. That last payment is larger than half the original note, and it arrives whether or not a bank is willing to refinance it. The monthly figure is what most people look at when they read the term sheet; the maturity date is what decides whether the note is affordable.

You and the seller file matching numbers

When a group of business assets changes hands and goodwill attaches, both parties must file Form 8594, and the price is allocated by the residual method. Cash comes off first. The rest goes to securities, receivables, inventory, equipment and real estate, and intangibles such as a noncompete, in that order and never above each asset's fair market value on the purchase date. Whatever is left over is Class VII, goodwill and going concern value.

The allocation is part of the deal, not paperwork after it. The split sets the buyer's basis in each asset and the seller's gain on each, so it is usually negotiated along with the price and written into the purchase agreement before either side files.

When an SBA lender is in the deal

7(a) proceeds can buy all or part of a business or an owner's interest in it (13 CFR 120.202). When a seller note and an SBA lender are in the same deal, SBA Form 155, the Standby Creditor's Agreement, has the seller subordinate "any lien rights in collateral" to the SBA lender and take no action against the borrower or the collateral without the lender's consent. Lenders may use their own standby form instead; either way, a copy of the note is attached. For the seller this means waiting behind the bank if things go wrong; for the buyer it means the seller cannot call the note or move on the collateral while the bank loan is outstanding unless the bank agrees.

How much of a seller note can count toward the buyer's equity, and for how long payments on it must stay frozen, are set in SBA's lending rulebook, SOP 50 10, which SBA revises from version to version. None of that appears on SBA's public loan pages, so the lender handling the 7(a) is the one to ask which version applies to the application and what it says about seller notes.