Can I buy a business using seller financing?

Seller financing means the seller agrees to receive part of the purchase price over time, under a promissory note, instead of receiving the full amount in cash at closing. It is one of the most common financing tools in Canadian small business transactions, particularly where a lender’s supportable value comes in below the agreed price.

A vendor take-back note can help close a deal that might otherwise stall on financing, and it signals to the buyer, and often to the buyer’s lender, that the seller has genuine confidence the business will continue performing after the sale. Sellers also sometimes accept a take-back for tax planning reasons, spreading a portion of the proceeds over more than one year.

A senior lender providing the primary term loan will usually require the vendor take-back to be subordinated to its own loan, meaning the seller only gets paid on that note after the senior lender’s payments are current. Lenders often also want the take-back on standstill terms during any period the buyer is in default, which the seller needs to understand and accept before agreeing to the structure.

• The interest rate and repayment schedule on the note, and whether payments are deferred at the start
• Security, if any, and where it ranks behind the senior lender’s claim
• Conditions that let the seller step in or accelerate the note if the business underperforms
• Whether the note is tied to post-closing performance or is a fixed, unconditional obligation

For the seller, a take-back means part of their retirement or reinvestment proceeds now depend on the buyer successfully running the business. For the buyer, it adds a second creditor with its own rights and remedies on top of the primary lender. Both sides benefit from independent legal advice on the note terms rather than relying on a template pulled from another deal.