One owner sold his restaurant/marina business for $1,200,000, payable $325,000 cash at closing and $125,000 each year over seven years. The $875,000 installment note did not carry an interest rate. The owner felt the total $1,200,000 was a fair price even if paid over seven years.
However, he didn't compute today's value of the $875,000 installment note. With a 10% interest rate (present value) applied to the payments, the $875,000 note was worth only $608,500 today, which is $266,500 (30%) less than its $875,000 face value. (Present value is today's value of a future stream of cash inflow based on an applied present value/interest rate. The 10% present value rate is high because of the risks of not being paid.)
Bigger mistake. The owner did not get the personal guarantees of the three doctors who bought his business. When they failed at running the business, the seller was forced to foreclose on the property (he did have a first lien on the assets) 19 months after he sold it. Now, after another 12 months of legal proceedings, he is out of retirement and back to full-time work running the business.
The settlement: He kept the $325,000 cash paid at closing and 15 months of installment payments, totaling $156,250, less legal expenses.
Important: When the buyers are passive investors, as these doctors were, it is especially important to get personal guarantees. Otherwise, passive investors are free to simply cut their losses and walk away from the deal with no further liability. That's what happened here, at the expense and inconvenience of this business owner.