For many business owners, selling their company represents the culmination of years, even decades, of hard work. It is more than just a transaction; it is the passing of a legacy. Increasingly, sellers are turning to seller financing as a way to bridge the gap between buyers and lenders, close deals faster, and create a steady income stream for retirement.

But let’s be clear. Seller financing is not without risk. When you offer this option, you are essentially stepping into the shoes of a bank. That means you are not just the seller; you are also the lender. And as a lender, you must think like one: you need strong legal protections in place to ensure your financial security.

Without the right agreements, you are leaving the door wide open for defaults, disputes, or even complete loss of the value you worked so hard to build.

This blog will walk you through the six essential agreements every seller needs in a seller-financed deal. Along the way, we will share practical examples, common mistakes, and how our firm helps business owners like you navigate this complex process.

1. Promissory Note: Your Foundation for Repayment

A promissory note is the backbone of every seller-financed deal. Simply put, it is the buyer’s enforceable promise to repay you.

It outlines:

• The amount financed

• Interest rate and how it is calculated

• Repayment schedule (monthly, quarterly, balloon payment, etc.)

• What happens if the buyer defaults

Think of it as the “IOU” that makes everything else possible. Without it, there is no clear evidence of the buyer’s obligation. If they fail to pay, you will have little ground to stand on in court.

Real-world example: Imagine you sell a small restaurant for $500,000, with the buyer paying $200,000 upfront and financing the remaining $300,000 through you. If you do not have a promissory note, and the buyer suddenly stops paying after six months, you could be left with nothing but legal headaches and no enforceable repayment terms.

A well-drafted promissory note also defines consequences. Late payment fees, acceleration clauses (which make the entire amount due immediately after default), and collection costs can all be built into the agreement. These terms create accountability and incentivize the buyer to stay current.

Our advice? Never rely on a handshake or casual arrangement. The promissory note is your insurance policy on repayment. It sets the legal tone for everything that follows.

2. Mortgage (or Deed of Trust): Securing Against Real Estate

If the business includes real estate, such as a hotel, retail store, or office building, the buyer’s repayment obligation should be secured against the property. That is where a mortgage or deed of trust comes in.

This agreement allows you to place a lien on the property. If the buyer defaults, you have the right to foreclose, just like a traditional bank would.

Why it matters:

• Protects your ability to recover value from the deal

• Discourages buyers from walking away

• Gives you leverage in negotiations if repayment issues arise

Consider a small hotel owner who sells her property through seller financing. Without a mortgage, if the buyer defaults, she may have no claim on the building she just sold. But with a mortgage, she can take back the property and resell it, preserving her financial security.

It is also worth noting that states have different rules on mortgages versus deeds of trust. Working with an attorney ensures you use the correct instrument for your jurisdiction.

Bottom line: A mortgage transforms your deal from unsecured hope to secured reality.

3. Assignment of Leases and Rents: Keeping Cash Flow Alive

Many businesses rely on rental income to stay afloat. Think of commercial landlords, strip mall owners, or even small business owners who sublease extra space.

An assignment of leases and rents ensures that if the buyer defaults on payments to you, you can step in and collect rental income directly from tenants. This keeps cash flowing to you, even when the buyer stops paying.

Here is how it works: Let’s say you sell a retail building where the main tenant is a profitable coffee shop. The buyer finances part of the deal with you. Six months later, they default. With this assignment agreement in place, you can bypass the buyer and collect rent directly from the coffee shop tenant until the buyer’s obligations are satisfied.

Without it, you would have to chase the buyer in court, while tenants keep paying them instead of you. That is wasted time and lost income.

This agreement essentially acts as a backup revenue stream. It does not just protect your financial interests; it also ensures the underlying business does not collapse due to missed payments.

4. Reserve Agreement: Protecting the Asset’s Value

Selling a business with real estate comes with added risks. Properties need ongoing care. Taxes must be paid, insurance kept current, and maintenance performed. If these essentials are ignored, the asset can quickly lose value.

That is why a reserve agreement is critical. It requires the buyer to set aside funds in a designated account to cover property taxes, insurance premiums, and capital improvements.

Think of it like an escrow account that ensures the property does not fall into disrepair while it is still tied to your financing.

For example, imagine selling a small apartment building. Without a reserve agreement, the buyer might skip paying property taxes to conserve cash. If that happens, the county could place a lien on the property, potentially putting your collateral at risk. With a reserve agreement, those payments are safeguarded, and your security remains intact.

This is not just about protecting the property. It is about protecting your financial legacy. A reserve agreement shows foresight and ensures the business stays healthy, even under less-than-ideal ownership.

5. Security Agreement: Beyond Real Estate

Not all business value lies in bricks and mortar. Many businesses thrive on assets like equipment, inventory, accounts receivable, or even intellectual property.

A security agreement, paired with a UCC-1 filing, allows you to take a lien on these assets. That means if the buyer defaults, you can repossess or claim the business’s tangible and intangible assets.

Think about selling a manufacturing company. The equipment on the shop floor may be worth hundreds of thousands of dollars. Without a security agreement, those machines could be sold off by the buyer, leaving you empty-handed. With one, you have a direct claim to those assets.

This agreement is especially important in industries like tech or design, where intellectual property is a major part of the company’s value. A security agreement ensures you are not just relying on cash flow. You have real leverage if things go south.

6. Personal Guaranty: Holding Individuals Accountable

Many buyers use newly formed business entities to purchase companies. While this structure makes sense for them, it creates a risk for you. If the entity fails, there is no personal liability for repayment unless you have a personal guaranty.

A personal guaranty requires the individual owners or principals behind the buyer’s entity to personally stand behind the debt. If the company cannot pay, they must.

Consider this scenario: A buyer forms an LLC with minimal assets, then uses it to purchase your business. Six months later, the LLC defaults. Without a guaranty, you would have no recourse beyond the failing entity. With one, you can pursue the buyer’s personal assets, ensuring you are not left empty-handed.

This agreement is one of the most powerful tools you have in seller financing. It turns a faceless entity into a deal with real accountability.

Final Thoughts: Turning Seller Financing Into a Win-Win

Seller financing can be a win-win. It helps buyers acquire businesses when traditional lending falls short. It provides sellers with ongoing income and smoother transactions. But without the right agreements, it exposes sellers to unnecessary risk.

By requiring a:

• Promissory note

• Mortgage or deed of trust

• Assignment of leases and rents

• Reserve agreement

• Security agreement

• Personal guaranty

You transform the arrangement from an unsecured promise into a well-protected transaction.

At Carbon Law Group, we have helped countless small business owners structure seller-financed deals that safeguard their financial future while making transitions smooth for buyers. Our job is to make sure you walk away with peace of mind, knowing the legacy you have built is protected.

👉 Book your consultation now and take the first step toward protecting your brand’s future.

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