A seller who carries a note becomes one of the buyer's lenders: part of the price arrives later, as payments with interest, out of a business the seller no longer runs. The Internal Revenue Service treats any sale with at least one payment after the year of sale as an installment sale (IRS Publication 537). When the buyer also borrows under the SBA 7(a) program, the seller's note counts toward the buyer's equity only on full standby, behind the lender, for the life of the loan (SBA Standard Operating Procedure 50 10 8.1, Appendix 15).
The tax and lending rules below are federal rules in the United States, set out as general information; none of it is tax, legal or investment advice on a particular sale.
Why a buyer asks for a seller note
A buyer asks for one when the loan and the buyer's own cash fall short of the price, or when the lender wants the seller to keep some money in the business. An SBA deal adds a third reason: a seller note on full standby can supply up to half of the buyer's required equity.
Cash at closing and money later
The sale and every number in this example are made up. One business, priced at $900,000, is offered to its owner three ways, at assumed rates.
| Offer | At closing | Paid to the seller later, if paid in full | Last payment | Who is paid before the seller |
|---|---|---|---|---|
| All cash | $900,000 | Nothing | At closing | No one |
| Cash and a note | $720,000 | $213,853 on a $180,000 note at 7%, $3,564 a month for 5 years | Month 60 | The buyer's bank, if it lent and holds the first lien |
| Buyer uses an SBA loan, note on full standby | $851,250 | About $85,678 on a $48,750 note at 5% that accrues for 10 years, then is paid monthly over 3 years | Year 13 | The SBA lender, for the life of its loan |
The third row assumes a total project cost of $975,000 once the buyer's own costs are added, so the buyer's required 10 percent is $97,500 and the standby note supplies half of it, the most the rules allow.
The second offer pays more dollars than the first, and each later dollar depends on five years of someone else running the business. The third puts $851,250 in the seller's hands at closing and makes the other $48,750 wait more than ten years, behind a lender that controls what the seller can do in the meantime.
The terms that set the seller's risk
Each term below is written into the note, and the seller note worksheet has a line for every one.
| Term | What the note settles | What it changes for the seller |
|---|---|---|
| Rate | The interest the buyer pays | The tax rules set a floor (see the tax section) |
| Term and amortization | How long the note runs, and whether the payments reach zero or leave a balloon, one large payment at the end | A balloon keeps more of the price unpaid until the final payment |
| First payment date | Month one, after an interest-only period, or after the bank loan is gone | The later the first payment, the longer the money depends on the business |
| Security | A lien on the business assets | A lien lets the seller claim those assets after a default. Under Article 9 of the Uniform Commercial Code a financing statement must generally be filed to perfect it (UCC section 9-310) |
| Personal guaranty | Whether the buyer personally promises to repay if the business cannot | A second source to collect from |
| Rank | What the seller agrees to with the buyer's bank | Whether anything can be collected while the bank's loan is outstanding |
| Default and cure | What counts as a missed payment and how many days the buyer has to fix it | What the seller can do next |
| Sale of the business | Whether the entire balance comes due if the buyer sells | Whether the seller is paid off when the business changes hands again |
| Reporting | Whether the buyer sends financial statements, and how often | Quarterly statements can show falling revenue before a payment is missed |
| Prepayment | Whether the buyer can pay the note off early, and on what terms | When the interest income stops |
A lien that was filed and still failed
In March 2017 the bankruptcy court for the Eastern District of Wisconsin let a bankruptcy trustee set aside a bank's security interest in a $104,000 promissory note (Lanser v. First Bank Financial Centre, Adversary No. 16-2418). The bank had filed a financing statement, but it typed the debtor's personal name into the box meant for an organization's name. The state filing office keeps individuals and organizations in separate databases, so a search under the debtor's own name, run the way the filing office's rules set out, would not find the filing. The court held the statement seriously misleading and therefore ineffective, which left the bank's interest unperfected when the bankruptcy began.
The Uniform Commercial Code's filing rules, as each state enacts them, and each state's filing-office rules govern a seller who takes a lien on the business's equipment to secure a note. If the buyer later files for bankruptcy, a trustee can set aside a security interest that was never perfected, as the court allowed here.
If the buyer uses an SBA loan
In an SBA deal the lender's rules decide several of those terms. A note that counts toward the buyer's equity is on full standby for the term of the SBA loan. The seller signs a standby agreement, SBA Form 155 or the lender's own equivalent, agreeing to take no action to enforce the note until the lender's loan is satisfied and to turn over any payment received in breach within fifteen days (SBA Form 155). Interest may accrue and be paid after the SBA loan is gone.
Three more rules in the SBA's change-of-ownership appendix apply to the seller directly. Seller earnouts are prohibited. After an initial acquisition the seller may not stay on as an officer, director, stockholder or employee, though the business may hire the seller as a consultant, for up to 24 months under the procedure that applies from October 1, 2026 and up to 12 months under the earlier one (SBA Standard Operating Procedure 50 10). Under the new procedure a provider of standby debt may not also take equity in the business. A note that is paid normally is allowed, and it counts in the buyer's debt service coverage; how a seller note works inside an SBA acquisition loan has the detail.
How a seller note is taxed, in outline
Publication 537 lets the gain on an installment sale generally be reported as the payments arrive, on Form 6252. Several details matter to a seller who carries a note:
- The sale is asset by asset. When all the assets of a business are sold, each asset is generally treated as sold separately, and the residual method allocates the price among them (IRS, Sale of a business). Inventory does not qualify for the installment method.
- Depreciation recapture is due in the year of sale, whether or not a payment arrived that year. A seller who carries a large note can owe tax on recapture before the note has paid much.
- Interest received is ordinary income.
- The rate has a floor. If the note states too little interest, the tax rules treat part of each payment as interest anyway. The test uses the applicable federal rates, which the Internal Revenue Service publishes each month as revenue rulings (IRS, Applicable federal rates).
- Borrowing against the note can count as payment. When the selling price is over $150,000 and the seller pledges the note as security for a loan, the loan proceeds can be treated as a payment on the note.
The seller's accountant and lawyer
Before the purchase agreement is final, the seller's accountant works out the tax due in the year of sale under the proposed allocation, even though part of the price arrives later. The seller's lawyer drafts or reads the note, the security agreement and any standby agreement with the buyer's lender, and sees that the financing statement is filed under the buyer's exact legal name.
Sources
- Internal Revenue Service, Publication 537, Installment Sales (for 2025 returns): definition, Form 6252, depreciation recapture in the year of sale, inventory, interest as ordinary income, adequate stated interest, the pledge rule and its $150,000 threshold. Accessed 2026-09-27.
- U.S. Small Business Administration, Standard Operating Procedure 50 10, Lender and Development Company Loan Programs: version 8.1 with Technical Policy Updates (published September 25, 2026, effective October 1, 2026) and version 8 (effective June 1, 2025): 8.1 Appendix 15 (standby seller debt as equity, earnouts, seller employment, standby lenders and equity) and the 12-month consultant limit in 8. Accessed 2026-09-27.
- Uniform Commercial Code section 9-310, via Cornell Legal Information Institute: when a financing statement must be filed. Accessed 2026-09-27.
- U.S. Bankruptcy Court for the Eastern District of Wisconsin, Lanser v. First Bank Financial Centre, Adversary No. 16-2418, memorandum decision of March 17, 2017. Accessed 2026-09-27.
- U.S. Small Business Administration, Form 155, Standby Creditor's Agreement. Accessed 2026-09-27.
- Internal Revenue Service, Sale of a business: each asset treated separately; the residual method. Page last reviewed February 10, 2026. Accessed 2026-09-27.
- Internal Revenue Service, Applicable federal rates: published monthly as revenue rulings. Accessed 2026-09-27.