Dear Mr. Bennett, Per your request, I have prepared this memorandum to explain some of the consequences of a seller taking back a note. It is for informational purposes only and is not intended to be legal advice. As you know, sometimes it is in the seller's best interests to take back a promissory note on the sales of his or her business. For example, financing may not be readily available for the buyer, or taking back a note may allow the seller to receive a more favorable price. Also, taking back a note may allow the seller to spread out his taxable gain from the sale.
Most sellers fear the consequences of their buyer defaulting on the note.
The promissory note should include provisions for grace period, late charges, default interest, and attorney's fees. If the buyer of the business is a corporation or limited liability company, the note must be personally guaranteed by the buyer and spouse, if the buyer is married. In such case, the seller will be seeking a personal judgment for the amount due that can be satisfied from the buyer's personal assets. Most married couples hold their assets jointly and, if the buyer is married, unless the judgment is also against the spouse, the seller will not be able to collect on his judgment. The note must be secured by adequate collateral.