Every HR leader has seen it. Your company’s founder or owner starts talking about retirement. The succession planning begins. You identify the perfect internal candidate – someone who knows the business inside out, has earned the team’s respect, and demonstrates the leadership qualities needed to take the helm.
Then reality hits. Your ideal successor doesn’t have $2 million sitting in a bank account to purchase the business.
Traditional succession planning focuses intensely on who will lead. It maps out skills gaps, develops high-potential employees, and ensures knowledge transfer. But there’s a massive blind spot in most succession strategies: the financial mechanics of actually transferring ownership.
The Gap Between Leadership Readiness and Financial Capacity
Consider Maria, the VP of Operations at a mid-sized manufacturing company. She’s worked there for 15 years. She understands every aspect of the business, from production floor dynamics to customer relationships to vendor negotiations. The owner trusts her completely. Employees respect her. Clients know her.
She’s the obvious choice to take over when the owner retires.
There’s just one problem. The business is valued at $3.5 million. Maria has been well-compensated over the years, but she hasn’t accumulated millions in liquid capital. She’s built a solid nest egg for retirement, maybe has some home equity, but coming up with the cash to buy a multi-million dollar business? That’s a different challenge entirely.
This scenario plays out in businesses every single day. The best person to run the company can’t afford to buy the company. And traditional bank financing often doesn’t bridge the entire gap, especially for smaller businesses without pristine financials or substantial hard assets.
Why Internal Succession Makes Business Sense
Before diving into solutions, it’s worth understanding why internal succession matters so much. When an external buyer purchases a business, the transition creates massive uncertainty. Will they keep the current team? Change the culture? Understand what makes this particular business successful? Maintain relationships with key clients and vendors?
Internal succession eliminates many of these concerns. The successor already knows the business intimately. Customers and vendors have existing relationships with them. Employees don’t face the anxiety of working for a complete unknown. The learning curve is dramatically shorter, and the risk of post-acquisition disruption is significantly lower.
For HR leaders, internal succession also means continuity in company culture, retention of institutional knowledge, and maintaining the employment stability that allows your team to focus on their work rather than worrying about their future.
There’s also the practical reality that finding external buyers willing to pay fair value for small to mid-sized businesses is challenging. Many business owners discover that the market for their company is much smaller than they hoped, and the prices offered are disappointing. When you’ve built something for decades, selling to someone who truly values it and will carry it forward has emotional and financial importance.
Enter Seller Financing: The Structure That Makes Internal Succession Possible
This is where seller financing transforms impossible transitions into achievable ones. Instead of requiring the buyer to come up with the entire purchase price upfront, the seller agrees to be paid over time.
Here’s how it typically works. The buyer provides a down payment – perhaps 20-30% of the purchase price. The seller then finances the remainder, essentially becoming the bank. The buyer makes monthly payments to the seller over an agreed-upon term, usually 5-10 years, with interest.
For Maria’s situation, this might look like: $700,000 down payment (perhaps through a combination of her savings, a small business loan, and possibly some equity investors), and $2.8 million financed by the seller at 6% interest over 7 years.
This structure makes the purchase achievable for Maria. The business itself generates the cash flow to make the payments to the retiring owner. Meanwhile, the former owner receives a steady income stream during retirement, often at a higher return than they’d get from many traditional investments.
For the HR professional involved in this transition, seller financing means your company can execute a smooth leadership transition without the disruption of bringing in outside buyers or the disappointment of a failed sale.
The Hidden Challenge in Seller Financing: What Happens When the Seller Needs Cash?
Seller financing solves the succession problem beautifully. Until the seller’s circumstances change.
Six months after the sale, the former owner’s spouse has a serious health issue requiring expensive treatment not fully covered by insurance. Or they decide to invest in a business opportunity that requires immediate capital. Or they simply realize that waiting 7-10 years for their money doesn’t fit their retirement plans as well as they thought.
Suddenly, those monthly payments aren’t enough. The seller needs a substantial lump sum. But the buyer – your newly promoted executive running the business – can’t just write a multi-million dollar check. The sale agreement is legally binding. The payment schedule is set.
This creates tension that can poison the transition. The former owner feels trapped. The new owner feels guilty but helpless. What should be a clean, successful succession starts to feel like a mistake for everyone involved. For business owners exploring smooth exit strategies or planning for future transitions, platforms like Exitwise can offer valuable insights and professional guidance on how to structure, market, and manage a successful business sale.
The Solution Most HR Leaders Don’t Know Exists: Business Note Sales
Here’s where sophisticated succession planning separates from basic succession planning. When a seller finances a business sale, they’re holding what’s called a business note – essentially a promissory note secured by the business assets. That note has value. And there’s a market for it.
Business note buyers are companies and investors that purchase these notes, providing the seller with immediate cash in exchange for the right to receive the future payments. It’s similar to how lottery winners can sell their annuity payments for a lump sum, or how people sell structured settlements.
For the former business owner, this means they can convert their payment stream into immediate capital if their needs change. They’re not trapped waiting years for their money.
For the new business owner, nothing changes. They continue making the same monthly payments they agreed to – just to a different entity. The terms don’t change. The business operations aren’t affected.
For the HR professional, this knowledge transforms how you approach internal succession planning. You can confidently recommend seller financing structures knowing there’s an exit strategy for the seller if circumstances change.
How This Changes the Succession Planning Conversation
Imagine sitting in a meeting where the owner expresses concern about internal succession. “I want Maria to take over, but she can’t afford to buy the business. And I need the money from the sale for retirement.”
Without understanding seller financing and business note sales, you’re stuck. The conversation ends with “I guess we’ll need to find an external buyer.”
With this knowledge, you can facilitate a different discussion. “What if we structured the sale with seller financing? Maria can afford a solid down payment, and the business cash flow supports the monthly payments. If your circumstances change and you need a lump sum instead of monthly payments, you have options to sell that note to specialized buyers. This way, Maria takes over, your employees keep their jobs with a leader they trust, and you’re not locked into a payment schedule that might not work for your retirement.”
This opens possibilities that otherwise don’t exist. It turns “impossible” into “here’s how we make this work.”
Structuring for Success: What HR Leaders Should Know
If your organization is considering internal succession with seller financing, there are several elements that make the structure more attractive to both parties and to potential note buyers if the seller later wants liquidity.
Strong Down Payment The larger the down payment, the better for everyone. It demonstrates the buyer’s commitment, reduces the seller’s risk, and makes the note more valuable if the seller later wants to sell it. Aim for 20-30% minimum, though 35-40% is even better.
Reasonable Interest Rates Market-rate interest on the seller note makes the arrangement fair and also maintains the note’s value. Below-market rates might seem generous, but they reduce what the note can be sold for later.
Clear Documentation Proper legal documentation is crucial. The promissory note should be professionally drafted with clear payment terms, default provisions, and security interests in business assets. This protects both parties and makes the note more liquid if the seller wants to sell it.
Personal Guarantees Having the buyer personally guarantee the note is standard practice. It ensures commitment and reduces risk.
Performance Benchmarks Some agreements include provisions tied to business performance. These protect the seller while giving the buyer room to operate.
The HR Leader’s Role in Succession Planning
As an HR professional, you’re uniquely positioned to facilitate these conversations. You understand the human dynamics – who has the leadership capability, who has earned trust, who understands the culture. But you also understand the business implications of different succession scenarios.
When ownership transition discussions begin, being able to speak intelligently about seller financing structures and business note liquidity adds strategic value that elevates HR’s role beyond pure people management.
You become a bridge between the emotional aspects of succession (the owner’s desire to see their legacy continued, the employees’ need for stability) and the financial mechanics that make it possible.
Questions to Ask When Internal Succession Discussions Begin
When your organization starts discussing succession, these questions help uncover whether seller financing is a viable path:
- About the Potential Buyer:Â Does the internal candidate have the capability to run the business successfully? Can they raise 20-30% of the purchase price for a down payment? Do they understand the commitment of purchasing the business?
- About the Owner:Â Is the owner open to seller financing, or do they need cash immediately? What are their retirement income needs? Do they understand they have options to sell the note later if needed?
- About the Business:Â Does the business generate sufficient cash flow to support monthly payments to the seller while still operating successfully? Are the financials clean and documentable? What assets secure the transaction?
- About the Timeline:Â When does the owner want to transition? Is there time to structure this properly? How long of a payment term makes sense?
- These questions guide whether seller financing is the right approach and how to structure it for success.
Real-World Example: When It All Comes Together
Consider a regional engineering firm with 45 employees. The founder planned to retire at 65. His Director of Engineering, Robert, was the clear successor – 18 years with the company, respected by clients and staff, technically excellent, and solid on business development.
The business was valued at $4.2 million. Robert could raise $900,000 between his savings, a small business loan secured by his home, and two small equity investors who believed in him. That left $3.3 million.
They structured a seller note with a 7-year term at 6% interest. Robert took over as CEO. The transition was seamless because employees already knew and trusted him. Client relationships were maintained. The business continued growing.
Three years later, the former owner’s mother required expensive long-term care. Between that cost and other retirement expenses, the monthly payments weren’t enough. He needed a larger lump sum.
He contacted a business note buyer, explained the situation, provided documentation showing Robert’s perfect payment history and the business’s continued profitability. The note buyer purchased the remaining balance for a fair market price, providing the former owner with immediate liquidity.
Robert’s payments didn’t change at all – he just sent them to a different entity. The business wasn’t disrupted. The former owner got the cash he needed. The employees kept their jobs with continuity of leadership.
From an HR perspective, what could have been a crisis – either a disrupted sale or an unhappy former owner creating tension – was simply a non-event. The succession plan had accounted for this possibility.
The Bottom Line for HR Leaders
Succession planning without considering the financial structure is incomplete succession planning. The best leadership candidate doesn’t help if they can’t afford to buy the business and external buyers would disrupt everything you’ve built.
Seller financing makes internal succession financially viable. Business note sales ensure the seller isn’t trapped in a long-term payment schedule if circumstances change. Together, they transform succession from a theoretical exercise into a practical solution.
As an HR leader, understanding these financial mechanics doesn’t mean you need to become a business broker or financial advisor. But knowing these options exist and bringing them into succession discussions makes you a more strategic partner in your organization’s future.
The next time your owner mentions succession and your ideal candidate doesn’t have millions in liquid assets, you’ll know there’s a path forward. You’ll know that the apparent conflict between “who’s the best leader” and “who can afford to buy the company” isn’t actually a conflict at all.
It just requires structuring the transition thoughtfully. And that’s where HR’s combination of people insight and strategic thinking creates real value.
Guest writer
