How do I protect myself if I finance the buyer?

Financing part of your own sale price puts you in the position of a lender, and the protections a lender would insist on are exactly what a selling seller should be asking for too. The difference is that most sellers are focused on getting the deal done and give this far less attention than an institutional lender would.

Take real security, not just a promise

A promissory note alone is only as good as the buyer’s willingness and ability to pay. Security, such as a general security agreement over the business’s assets, a pledge of the shares being sold, or a mortgage against real property if any is involved, gives the seller something to enforce against if payments stop, rather than simply a claim to sue on that may be worth little against a struggling business.

Get a personal guarantee where you can

A personal guarantee from the buyer extends the seller’s recourse beyond the business itself to the buyer’s personal assets, which matters most precisely when the business has failed and has little left to recover from. Buyers resist this, and it is not always obtainable, but it is worth asking for as a starting position rather than conceding it early.

Negotiate the subordination terms, do not just accept them

Where a senior lender is financing the rest of the deal, that lender will require the vendor take-back to be subordinated, but the specific terms of that subordination are negotiable: how much room the senior lender has before the seller’s rights are affected, what notice the seller gets, and whether the seller can act at all while the senior loan is performing. A seller who leaves this entirely to the buyer’s lender’s standard document is accepting whatever terms that lender considers convenient for itself.

Build in visibility, not just remedies

Ongoing reporting rights, such as periodic financial statements, notice of material changes, and the right to ask questions, let a seller notice a problem developing before a payment is actually missed, which is far more useful than the strongest enforcement rights exercised too late. A seller who only finds out about trouble when a payment does not arrive has already lost the chance to act early.