Structuring Owner-Carry Notes When Selling a Business

In today's tight credit market, seller financing has become an essential tool in getting deals across the finish line. Traditional bank financing has become increasingly difficult—many qualified buyers are still being turned down despite their merits. The bailout never really made it to Main Street.

Because of this, sellers must structure their financing notes carefully and securely. A well-structured note increases the likelihood of full repayment and protects the seller if the buyer defaults.

Key Considerations When Carrying a Note

1. Set Realistic Monthly Payments

The seller should realistically assess how much the business can support in monthly debt service. If the business generates $5,000 in monthly owner benefit or adjusted net income, the note payment must be less than that. The buyer must still make a living and reinvest in the business. Avoid setting your buyer up for failure.

Critical Terms and Protections for a Strong Seller Note

2. Late Fee Provision

• Standard clause: Payment due 30 days after closing; late fee kicks in after 10 days.

• Typical penalty: 6% of the monthly payment.

• Preferred clause: 10-day grace period with a 10% penalty.

A strong late fee clause reinforces payment discipline. Most buyers will avoid ever being late again after one warning.

3. Collateral and Security Agreement

• The business’s assets (equipment, inventory, etc.) serve as collateral.

• Use a Security Agreement attached to the note.

• Ensure the agreement:

  • Requires seller consent to transfer or substitute collateral.

  • Includes an itemized list of equipment.

  • Clearly defines what constitutes a breach for enforceability.

Not all security agreements are created equal—read yours carefully.

4. UCC-1 Financing Statement

• File a UCC-1 with the Secretary of State to "perfect" your security interest.

• Ensure the form covers:

  • All equipment and fixtures

  • Inventory, receivables, deposits, cash

  • Any other tangible business assets

This filing protects your interest and gives legal standing in the event of a default.

5. Reassignment of Lease as Collateral Security

• This is critical but often overlooked.

• In a normal lease assignment, the seller gives up all rights to the premises.

• However, if the buyer defaults on the note or lease, the seller cannot automatically reclaim the property.

How to protect yourself:

Use a Reassignment of Lease as Collateral Security agreement, signed by the:

• Buyer

• Seller

• Landlord

This agreement stipulates:

• If the buyer defaults on the lease or the note, the lease automatically reverts to the seller.

• This right exists from day one and remains active until the note is fully paid.

• Avoids needing landlord approval later, when leverage is lost.

This document gives you a path to reclaim the business premises along with the assets.

Final Thoughts

A well-structured seller note:

• Increases your chances of full repayment.

• Protects your interests in case of buyer default.

• Improves the resale value of your note if you decide to sell it later.

Seller financing isn't just about helping the buyer—it's about protecting yourself and setting the deal up for long-term success. In a world where bank financing is limited, your note becomes the bridge between listing and closing. So make it solid.