Financing
Seller notes and full standby
A seller note means the seller lends you part of the price. It lowers the cash you need, and it keeps the seller invested in the business doing well after they leave.
In a seller-financed deal, the buyer pays most of the price at closing and owes the rest to the seller over time, with interest. Seller notes are common in small-business acquisitions because they solve two problems at once: they close the gap between what a lender will finance and the asking price, and they signal that the seller believes in the business.
Why a seller note is good for the buyer
- Less cash at closing. The note replaces part of the bank loan or your own cash.
- Aligned incentives. A seller who is owed money wants the business to succeed after the sale, and is more likely to help with the transition.
- A signal. A seller who refuses any note at all on a business they describe as stable and growing is telling you something.
Two kinds of seller note in an SBA deal
A standby note counted as equity. Under SBA SOP 50 10 8.1 with Technical Updates, effective October 1, 2026, Appendix 15, a qualifying subordinated seller note can count toward an initial acquisition's required 10% equity injection if it is on full standby for the entire SBA loan term. Full standby means no principal or interest payments during that time. Seller debt and other limited equity sources together can satisfy no more than half of the required injection. Confirm the note and standby agreement with the lender before treating any amount as eligible equity.
An additional note that is paid. A seller can also carry a note that is not counted as equity. It can be paid during the SBA loan's term if the lender agrees, and the lender will include its payments when calculating debt service coverage.
A worked example
A $600,000 purchase with $40,000 of closing costs and working capital has a total project cost of $640,000. The minimum injection is $64,000.
- All cash injection: the buyer brings $64,000.
- Half from a standby note: the buyer brings $32,000 and the seller carries a $32,000 note that receives nothing for up to ten years.
A seller weighing the second option is accepting a long wait for that portion of the price. Interest can accrue during standby if the note allows, but nothing is paid. Explain this early. It is a common source of late-stage surprises.
Structuring a paid seller note
- Rate and term. Typical notes run three to seven years. Model them in the seller note calculator.
- Subordination. The bank will require the note to rank behind its loan.
- Interest-only or deferred periods. A short deferral gives the business time to settle after the transition.
- Offset rights. Some buyers negotiate the right to reduce note payments if the seller's representations turn out to be untrue. Lenders and sellers may resist, so discuss it with your attorney.
Seller note or earnout?
An earnout ties part of the price to future performance, such as revenue staying above a level. It suits disagreements about what the business will do. A seller note suits disagreements about how much cash you can bring today. Seller earnouts are prohibited for 7(a) changes of ownership under Appendix 15; buyer rebates have different treatment. Discuss the actual purchase agreement with your lender and attorney.