Seller financing: how it works when you buy or sell a UK business

Seller financing is when the seller of a business lets the buyer pay part of the purchase price after completion, usually in instalments over a few years with interest. The buyer pays the rest on the day the deal completes, typically from their own money and a loan to buy a business. In effect, the seller becomes one of the buyer's lenders.

In the UK, seller financing is often the piece that makes a small business sale possible. Banks and other lenders will often fund part of a purchase, but rarely all of it, and seller financing helps close the gap between what the buyer can raise and what the seller wants. This guide covers how seller financing works, the structures used in UK deals, what the repayments look like, the security sellers ask for, how it's taxed and how to combine it with other funding.

What is seller financing?

Seller financing is an arrangement where the seller of a business agrees to receive part of the sale price at a later date, rather than all of it at completion. A fixed deferred amount is a debt the buyer owes the seller, repaid under terms written into the sale agreement or a separate loan document. An earn out is different, because it only becomes payable if agreed targets are met. You'll see the same idea described in several ways in the UK:

• Vendor finance or a vendor loan is another name for the same arrangement.

• Deferred consideration is the legal term for any part of the price that's paid after completion.

• A vendor loan note is a formal debt document the buying company issues to the seller.

• An earn out is a type of deferred payment that only becomes due if the business hits agreed targets.

The term vendor finance is also sometimes used for a supplier giving a customer time to pay for goods, which is a different arrangement. This guide covers seller financing when a business, or the shares in a company, changes hands.

How does seller financing work?

Seller financing works by splitting the purchase price into two parts: an upfront payment at completion and a deferred balance the buyer repays over an agreed period. A typical deal follows these steps.

1. The buyer and seller agree a price and set out the main deal terms in heads of terms, a short document that isn't usually legally binding but records what's been agreed.

2. They agree how much will be paid at completion and how much the seller will defer, along with the interest rate, repayment term and any targets for an earn out.

3. The buyer arranges the money needed for completion, usually a mix of their own funds and an acquisition loan.

4. Solicitors for both sides write the deferred payment terms into the sale agreement or a loan note, including the security the seller will hold.

5. At completion, the seller receives the upfront payment and the buyer takes control of the business.

6. The buyer repays the seller from the business's profits over the following months or years.

The buyer is often a company set up to make the purchase. In that case it's the buying company, not the buyer personally, that owes the seller, which is one reason sellers may ask for extra protection. The main types are covered below.

Why would a seller agree to seller financing?

A seller agrees to seller financing because it can lead to a better price, a wider pool of buyers or a sale that otherwise wouldn't happen. Many small businesses are valued mainly on their profits and goodwill rather than physical assets, and lenders can be cautious about lending heavily against goodwill. That limits how much a buyer can borrow.

Faced with a funding gap, a seller can lower the price, wait for a buyer with more cash, or accept part of the price later. Deferring part of the price can be the option that gets the deal done at the value the seller wants. It also earns the seller interest on the deferred amount.

Seller financing also sends a signal. A seller who is willing to be paid from the business's future profits is showing confidence that those profits will continue. Buyers and lenders can take some comfort from that, which can make the rest of the funding easier to arrange.

What are the benefits and risks of seller financing for buyers?

For a buyer, seller financing reduces how much cash and borrowing you need on day one. It can also make the overall deal more achievable and give you a seller who has a reason to support a smooth handover. The main benefits for buyers are:

• You need a smaller deposit and a smaller acquisition loan, which can bring a purchase within reach.

• Repayments can be spread over several years and paid from the profits of the business you've bought.

• Seller financed debt can be more flexible than bank debt, since the terms are negotiated directly with the seller.

• A seller who is still owed money has a strong reason to help with the handover of customers, staff and suppliers.

• An earn out can bridge a disagreement on value, so you only pay the higher price if the business performs.

The main risks for buyers are:

• The business has to support repayments to the seller and any bank lender at the same time, which can squeeze cash flow in the first few years.

• Sellers may ask for a personal guarantee, which can put your personal assets at risk if the business struggles.

• A large final payment at the end of the term can be hard to meet if profits dip.

• Earn outs can lead to disputes over how profit is measured and what you're allowed to change in the business.

What are the benefits and risks of seller financing for sellers?

For a seller, seller financing can secure a better price and a faster sale. The trade off is that part of your money stays tied to a business you no longer control. The main benefits for sellers are:

• A wider pool of buyers can afford the business, including management teams and first time buyers.

• You may achieve a higher price than you would by insisting on full payment at completion.

• The deferred balance earns interest, which adds to the total you receive.

• Spreading the payments may let you spread the capital gains tax bill too, in the right circumstances.

The main risks for sellers are:

• You may not receive the full price if the business struggles under new ownership.

• You no longer run the business, so you rely on the buyer's decisions to protect your money.

• In an insolvency, you may rank behind the bank and other creditors, even with security.

• Capital gains tax can be due on the full price for the tax year of the sale, before you've received all of it.

Which seller financing structures are used in the UK?

There are three main ways to structure seller financing in the UK: fixed deferred consideration, a vendor loan note and an earn out. Each one changes when the seller is paid, what payment depends on and when tax is due.

Fixed deferred consideration is the simplest option. Vendor loan notes are more formal and are often used in management buyouts, where the management team buys the company from its owner.

What should an earn out agreement include?

An earn out needs careful drafting, because the buyer controls the business that decides whether the seller gets paid. A clear earn out agreement should:

• Define exactly how the target is measured, including which costs and accounting policies count.

• Give the seller the right to see the figures and check how they were worked out.

• Limit what the buyer can change during the earn out period, such as moving revenue to another company or adding new costs.

• Set out how disputes over the figures will be settled, for example by an independent accountant.

• State the most the seller can receive and what happens if the business is sold again during the earn out.

How much of the purchase price can be seller financed?

The share of the price that's seller financed is whatever the buyer and seller agree. There's no fixed rule and no reliable published data on typical amounts for UK small business sales, so treat any single percentage you see with caution. In practice, the amount usually depends on three things: how much the buyer can put in, how much a lender will provide, and how much the seller can afford to wait for. Lenders typically size an acquisition loan against the business's earnings before interest, tax, depreciation and amortisation, known as EBITDA, rather than the asking price. Seller financing then fills some or all of the gap between the loan, the buyer's deposit and the agreed price. Seller financing rarely covers the full price. Sellers usually want a significant payment at completion, and lenders generally expect the buyer to have their own money in the deal too.

What do seller financing repayments look like?

Seller financing repayments depend on the amount deferred, the interest rate, the term and whether the balance is repaid in equal instalments or in one lump sum at the end. The example below uses illustrative figures, not typical market rates. A buyer agrees to purchase a business for £600,000. The deal is funded like this:

The seller receives £420,000 at completion, with up to £180,000 more to follow. If the £120,000 loan note is repaid in equal monthly instalments, the buyer pays about £3,705 a month for 36 months. Total interest comes to about £13,389. If the loan note is interest only, the buyer pays £700 a month for 35 months, then £120,700 in the final month. Total interest rises to £25,200, and the business has to find a large lump sum at the end. A final lump sum like this, known as a balloon payment, can be hard to meet if profits dip, so make sure your cash flow forecast shows exactly how it will be paid.

Does the buyer need to deduct tax from interest paid to the seller?

A company paying interest to an individual seller usually needs to deduct basic rate income tax, currently 20%, where the loan can last more than a year. The company pays the tax to HMRC and reports it on a CT61 return for each quarter in which it pays interest. In the interest only example above, the seller would be due £8,400 of interest a year. The buying company would pay the seller £6,720 and pay the remaining £1,680 to HMRC. It's easy to overlook, so build it into your payment process from the start.

Is seller financing legal in the UK?

Seller financing is legal in the UK, and it's commonly used in private company sales and management buyouts. The old rule that stopped a company giving financial help towards the purchase of its own shares was abolished for private limited companies in 2008. It still applies to public companies. Directors of the buying company still have a legal duty to act in the way most likely to promote the company's success. Before agreeing to seller financing, they should be confident the business can afford all its repayments, to the seller and any lender, from the cash it generates. If the margin looks tight, take advice from an accountant before signing.

What security does a seller usually ask for?

A seller usually asks for security over the shares or assets of the business they've sold, so they have a way to recover their money if the buyer stops paying. Common forms of protection are a charge over the shares, a debenture over the company's assets and a personal guarantee from the buyer.

Charges and debentures

A charge over the shares can let the seller take ownership of the shares if the buyer defaults. A debenture gives the seller security over the company's assets, usually through a fixed charge over specific assets and a floating charge over everything else, such as stock and cash. A charge created by a company needs to be registered at Companies House within 21 days, starting the day after it's created. It costs £14 to register a charge online using form MR01. If the deadline is missed, the charge is void against a liquidator, administrator or other creditors, the money it secures becomes repayable immediately, and only a court can allow it to be registered late. Sellers' solicitors should treat the 21 day deadline as a priority.

Personal guarantees

A seller may ask the buyer, or the directors of the buying company, to personally guarantee the deferred balance. This means you're personally responsible for the debt if the business can't pay. If you're asked for one, take independent legal advice and try to negotiate a cap on the amount and a reduction as the balance is paid down.

Right of set off

Buyers can ask for protection too. A right of set off lets the buyer deduct valid claims under the sale agreement, such as a breach of a warranty given by the seller, from payments due on the deferred balance. Sellers may resist this, so one compromise is to limit set off to claims that have been agreed or decided, up to a set amount.

How does seller financing work alongside a bank loan?

Seller financing usually sits behind any bank or lender debt used to fund the purchase. Lenders will usually expect the seller's debt to rank after theirs, so they're repaid first if something goes wrong. This is usually agreed in a deed of priority or an intercreditor agreement signed by the lender, the seller and the buyer. It sets out who ranks first for security and when the seller can be paid. Lenders can include a condition that stops payments to the seller if the business breaches the terms of the bank loan.

Lenders can view seller financing positively, because it reduces the amount they need to lend and shows the seller believes in the business. Telling a lender about the seller financing early gives them a clearer picture of the whole deal and helps avoid delays close to completion. Our guide to acquisition finance covers what lenders look for when funding a business purchase.

What happens if the buyer can't repay the seller?

If the buyer can't keep up repayments, the first step is usually to talk. Sellers may prefer to agree a revised payment plan, since taking action against a business they've just sold can reduce the value of what they're owed. If the buyer defaults and the agreement allows it, a seller with a charge over the shares may be able to take back control of the company. In practice, this is less useful than it sounds, as a business struggling to pay its debts may have lost much of its value by that point. If the buying company becomes insolvent, money is paid out to creditors in a fixed order. Broadly, that order is:

• Creditors with a fixed charge over specific assets.

• The costs of the insolvency process.

• Preferential creditors, mainly certain amounts owed to employees, such as unpaid wages and holiday pay.

• HMRC, for taxes such as VAT and PAYE that the company collected but didn't pay over.

• A ring fenced fund set aside for unsecured creditors, known as the prescribed part.

• Creditors with a floating charge.

• Unsecured creditors.

A seller with no security ranks with the other unsecured creditors, so they may recover little. Security improves the seller's position but doesn't guarantee repayment, especially if a bank holds a higher ranking charge. For sellers, the most important protection is choosing a buyer who has the experience and funding to run the business well. A company credit check on the buyer and their other businesses is a sensible part of that due diligence.

How is seller financing taxed?

Seller financing is taxed differently depending on how the deferred payment is structured, and the timing of the tax bill is often what shapes the deal. The rules below give an overview, but every sale is different, so both sides should take tax advice before agreeing terms.

When does the seller pay capital gains tax?

If the deferred amount is fixed at completion, the full price is included in the seller's capital gains tax calculation for the tax year of the sale, with no discount for the wait or for the risk of not being paid. Capital gains tax is due on the whole gain, even though part of the money won't arrive for years. If some of the deferred price later proves permanently irrecoverable, the seller can make a claim to adjust the tax at that point. Where the deferred price is paid in instalments over more than 18 months, the seller can ask HMRC to let them pay the tax in instalments as the payments arrive, for up to eight years. HMRC has to approve the arrangement, so it isn't automatic.

How are vendor loan notes taxed?

When a seller swaps their shares for loan notes issued by the buying company, the gain can sometimes be deferred until the loan notes are repaid, as long as the conditions for a share exchange are met. This can match the tax bill to when the seller actually receives the money. The catch is that deferring the gain this way can mean losing Business Asset Disposal Relief. To keep the relief, the seller may need to elect to be taxed at the time of the sale instead. The election must be made by the first anniversary of the 31 January following the tax year of the sale, and it has to cover all the shares exchanged, so it needs careful planning.

What is Business Asset Disposal Relief?

Business Asset Disposal Relief reduces the capital gains tax rate on qualifying business disposals. From 6 April 2026, qualifying gains are taxed at 18%, up to a lifetime limit of £1 million. From 6 April 2027, the lifetime limit falls to £500,000, and any relief you've already claimed counts towards it. There are rules for contracts agreed before that date but not completed, so if you're planning a sale around then, get advice on timing early.

How are earn outs taxed?

An earn out paid in cash is taxed in two stages. At the time of the sale, the right to receive future earn out payments is valued and taxed as part of the sale price. When each earn out payment arrives, it's taxed again as a separate gain or loss against that earlier value. Business Asset Disposal Relief usually only applies to the first stage. If the earn out is paid in shares or loan notes of the buying company, different rules can apply. If an earn out payment depends on the seller continuing to work in the business beyond what's needed to protect its value, HMRC may treat it as employment income instead, which is taxed as income rather than as a capital gain. Drafting the agreement so that payment for the shares is kept separate from payment for the seller's work helps reduce this risk.

What tax does the buyer pay?

A buyer of shares pays stamp duty of 0.5% on the price where it's more than £1,000. Stamp duty is worked out on the agreed price, including any fixed amount that's deferred, not just the money paid at completion. For an earn out, duty is usually based on any maximum or fixed figure set in the agreement, so ask your solicitor how yours will be treated. Stamp duty on shares is due to be replaced by a new securities transfer tax in late 2027. A buyer of business assets rather than shares may have VAT and property taxes such as Stamp Duty Land Tax to consider instead, depending on what's being bought.

How do you agree a seller financing deal?

You agree a seller financing deal by negotiating the deferred terms at the same time as the price, then writing them into the legal documents. Leaving the details until late in the process can delay completion. Before you sign heads of terms, make sure you've agreed:

• How much is paid at completion and how much is deferred.

• The interest rate on the deferred balance and whether interest is paid monthly or rolled up.

• The repayment term and whether repayments are equal instalments, interest only or a mix.

• Any earn out targets, how they're measured and the maximum payable.

• The security the seller will hold and whether a personal guarantee is needed.

• Whether the buyer can repay early without a penalty.

• What counts as a default and what the seller can do if one happens.

• Any right of set off for warranty claims.

Each side should have its own solicitor and accountant. The seller's advisers will focus on security and tax timing, while the buyer's advisers will focus on affordability, the guarantee and protection against warranty claims.

Fund the rest of your business purchase with Capitalise

Seller financing can cover part of the price, but you'll still need to fund the payment due at completion. Capitalise works with a panel of 130+ lenders, so you can compare acquisition loans, secured business loans and asset based lending that can sit alongside the seller's deferred payments. Our funding specialists can help you understand how lenders will view the deal, including the seller financing, before you commit to heads of terms. Apply for acquisition finance with Capitalise today and see which lenders could help you complete your business purchase.