Seller financing is when the person selling a business leaves part of the price in it, and the buyer pays that part off over the next few years. In a UK sale you will also hear it called vendor finance, a vendor loan, deferred consideration, or a vendor loan note, and all four describe the same arrangement. It exists to close a gap: what a buyer can raise on the day is usually less than the seller wants. The seller is often the only person willing to bridge it.

One warning about the words. Vendor finance also means a supplier financing your purchase of its goods, which is a different arrangement with different risks. This page is about buying and selling a company.

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Why a seller would agree to wait for their money

A seller who defers part of the price is lending money against a business they no longer control. They do it because it is often the only way the sale happens at all.

Banks are reluctant to lend against the goodwill of a small company with nothing solid behind it, so the buyer arrives with less cash than the asking price. A seller preparing a business for sale then has three choices: drop the price, wait for a cash buyer who may never turn up, or take part of the price in instalments. Deferring also says something no set of accounts can – that the person who built the business expects it to still be earning in three years' time.

What they want in return is interest on the money, security they can enforce, and terms that stop the business being hollowed out while they wait.

You will read confident percentages about all this: how much is usually deferred, over how long, at what rate. There is no official UK data behind any of them. The Office for National Statistics counts only mergers and acquisitions worth £1m or more, and says nothing about how they are funded. Every range in circulation comes from an adviser describing their own deal flow, and they contradict each other – the four we found for the deferred share run from 5% at the bottom to 60% at the top. What gets deferred on your deal is whatever the two of you agree.

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The three ways the deferred part is written down

How the deferred part is documented matters more than most buyers expect. It decides when the seller actually gets paid, what they can do if the payments stop, and when HMRC wants the tax. Three forms do almost all the work, and plenty of deals use two of them together:

Fixed deferred consideration is the simplest: a clause in the share purchase agreement saying you will pay a stated sum on a stated date. It is a debt, and nothing the business does afterwards changes it.

A vendor loan note is the same money written as a debt instrument the buying company issues to the seller. It lives in its own loan note instrument, separate from the sale agreement, setting out the principal, the interest rate, the redemption dates, and what counts as a default. The extra paperwork buys clarity on both sides, and it can change when the seller pays capital gains tax. Loan notes are common in a management buyout, where the buyers already run the business.

An earn-out makes part of the price conditional: the seller gets it only if the business hits agreed targets after completion, usually profit, and sometimes revenue or customer retention. It is how a buyer and a seller settle an argument about what the business is worth. If the buyer is right about next year, they pay less; if the seller is right, they get paid.

Earn-outs need the tightest drafting of the three. Define what the target measures, down to which costs count against it. Give the seller the information rights to check the figures. And agree what the buyer may not do while the clock is running: move revenue into another company, load the business with new costs, or change the accounting policies. One thing to know before you start: a ceiling does not make an earn-out certain. HMRC's guidance says a maximum figure does not mean the amount is known, and that distinction decides how the whole thing is taxed.

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What the payments actually look like

It's worth doing the maths before you agree anything, because the shape of the repayment, rather than its size, is usually what decides whether the business can carry it.

Take a business bought for £900,000. The buyer puts in £150,000 of their own money and borrows £300,000, so £450,000 changes hands at completion. The seller defers £300,000 as a loan note over three years at 6%, with a further £150,000 as an earn-out if profits hold up in the second year. These are illustrative figures, not a going rate.

Repaid in equal monthly instalments, that £300,000 note costs about £9,130 a month, and about £28,600 in interest across the three years. Repaid interest only, it costs £1,500 a month – and leaves the whole £300,000 due at the end. That final lump is the balloon payment, and it is where seller-financed deals most often come apart. The company has to find £300,000 in one go, or refinance it, three years after it has already absorbed the cost of being bought.

There is one more line to budget for. Because the seller is an individual rather than a company, the buying company has to deduct income tax at 20% from the interest and pay it over to HMRC. On the interest-only version, £18,000 of interest a year means £14,400 reaching the seller and £3,600 going to HMRC, reported quarterly on form CT61.

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Is seller financing legal in the UK?

Yes, if what you are buying is a private limited company.

The rule people half-remember – that a company cannot help someone buy its own shares – was repealed on 1 October 2009. What replaced it in the Companies Act 2006 is headed 'Assistance for acquisition of shares in public company', and that is exactly how far it reaches. A private company buyout sits outside it.

That does not mean the buyer's directors can sign anything put in front of them. They still have a duty to promote the success of the company, and taking on debt the business cannot service is not that. Before you commit, work out whether the company can pay the seller, the bank, and everyone else out of the cash it actually generates. If the answer is close, get advice before you sign rather than after.

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What the seller will ask for in return

A seller who defers is an unsecured lender to a business that somebody else now runs. Expect them to want that fixed, and expect their solicitor to ask for everything at once. Three terms do most of the work.

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Security, and the 21 days that decide whether it is worth anything

The usual ask is a charge: over the shares you have just bought, or over the company's assets as a fixed and floating debenture. On an asset purchase it attaches to the assets, and on a share purchase, usually to the shares themselves.

Then comes the part that gets missed. A charge created by a UK company has to reach Companies House within 21 days, beginning the day after the charge is created, on form MR01. Filing online costs £14. Miss the window and the charge is void against a liquidator, an administrator, and any other creditor – and the money it secured becomes immediately repayable. The seller ends up holding an unsecured debt they can demand today and probably cannot collect. If you are the seller, this is the one date in the whole transaction to put in your own diary rather than leave to somebody else's.

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A personal guarantee from a director

Sellers often ask a director of the buying company to guarantee the debt personally. That means that if the company cannot pay, you pay, out of your own money. It is a reasonable thing for a seller to want and a serious thing for a buyer to give. Read what a personal guarantee actually commits you to, and have it looked at. If you do agree to one, ask for a cap, and for it to fall away as the balance comes down.

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The one term that protects the buyer: a right of set-off

Most of this negotiation runs in the seller's favour. This is the term that runs the other way.

A right of set-off lets the buyer reduce the loan note payments against a claim under the sale agreement's warranties. If the business turns out to carry a liability the seller promised it did not, you take it off what you still owe rather than suing someone who already has your money. Without it, your protection on the warranties is only as good as the seller's willingness to hand some of it back.

Sellers resist set-off, and they will usually accept limits on it: a cap, a requirement that the claim is agreed or determined before anything is withheld, and a carve-out for amounts genuinely in dispute. Expect to land somewhere in the middle. Do not leave it out.

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What happens if the buyer cannot pay

Less than most sellers assume.

If the company fails, its money is paid out in a set order: whoever holds a fixed charge, then the insolvency practitioner's fees, then preferential creditors – employees, in the main – then HMRC's secondary preferential claim, then a ring-fenced slice for unsecured creditors, then anyone holding a floating charge, and only then everybody else. Since 1 December 2020 the VAT, PAYE, and employee National Insurance a company was holding when it failed rank ahead of banks with a floating charge and ahead of ordinary unsecured creditors. A seller with no security sits in that final group, behind all of it.

Security moves you up the queue. It does not put you at the front of it. If a bank lent as well, it will require the seller's debt to be subordinated under a deed of priority, which can stop the seller taking any payment while the company is in breach of the bank's terms. A charge over the shares can let a seller take the company back, though a business worth taking back rarely stops paying in the first place. Which is the honest answer to 'what if they default': most of the protection is in choosing a buyer who can run the place, not in the remedies.

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The tax timing that decides the deal

This is where sellers lose money, and it happens before completion rather than after. Get an accountant onto it before you agree heads of terms, not when you sign.

The default position is harsh. Where the deferred amount is known at completion – a fixed sum on a fixed date – HMRC treats the whole price as received on the day of the sale. Capital gains tax falls due on all of it in that tax year, including the part still sitting in the buyer's business. There is no discount for having to wait and no allowance for the risk that it never arrives. Relief comes only if the money later proves permanently irrecoverable, which is a high bar and a separate claim.

Loan notes can move that. Where notes are issued in exchange for shares and the conditions are met, the exchange counts as a reorganisation rather than a sale, so the tax point can shift to the day the notes are redeemed. But the relief that matters most to an owner-director does not travel with it. To claim Business Asset Disposal Relief you may need to elect to treat the exchange as a disposal after all, and that election has a deadline: the first anniversary of the 31 January following the tax year of the exchange. It also has to cover all the shares or none of them.

Business Asset Disposal Relief charges qualifying gains at 18% for disposals on or after 6 April 2026, up to a £1 million lifetime limit. If you read 10% or 14% somewhere, both are out of date.

Earn-outs carry two traps. Because the amount is not known at completion, the right to receive it counts as an asset in its own right: it is valued and taxed when the deal completes, taxed again each time an instalment arrives, and Business Asset Disposal Relief applies only to that initial right rather than to the later payments. The second trap is worse. Where an earn-out pays out only if the seller stays on as a director or employee, HMRC may treat it as employment income rather than a capital gain – income tax and National Insurance instead. Keep what the seller is paid for their shares separate from what they are paid for their work, and say so in the drafting.

One smaller item to budget for: buying shares usually carries stamp duty of 0.5%, payable where the consideration is over £1,000.

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Where the rest of the purchase price comes from

Seller financing never covers the whole price. There is always a payment due on the day, and finding it is the buyer's problem.

Start with what we cannot do. iwoca does not provide the vendor loan, because nobody except the seller can lend on those terms – nobody else is being paid for the business. What we do have is manda, our mergers and acquisitions platform for UK small businesses typically valued between £500,000 and £10m. It arranges the acquisition finance as part of the deal, so a buyer knows what they can raise before making an offer, and sellers pay a success fee only, on completion. Senior debt, your own contribution, and what a lender checks make up the rest of an acquisition's funding.

In action: ECF Accident Repair Group

Stephen Murray had run ECF for years and wanted to buy it. Rather than bring in private equity for the money, he funded the management buyout with a £500,000 loan from iwoca – and kept the whole business.

Read Stephen's story

The months straight after completion are usually the tightest the business will ever see. You are paying the seller's instalments, the bank, and your suppliers out of the same cash, while you find out what the previous owner left behind. Our Flexi-Loan might be helpful at this point. Its flexible repayment options make it a nice fit for the business you now own rather than the vehicle that buys it. You have 30 days to draw down after approval, so a facility can be agreed before completion and taken the week the cash runs short. Interest is charged on what you draw rather than on the limit.