Seller financing is one of the most powerful tools in business acquisition deal structuring. Here's how it works:
How seller financing works: Instead of receiving the full purchase price at closing, the seller agrees to be paid a portion over time — essentially becoming a lender to the buyer. This aligns interests: the seller wants the business to succeed post-sale because their payout depends on it.
Typical seller note terms: - Amount: 10–30% of purchase price - Interest rate: 5–7% (sometimes negotiable) - Term: 3–7 years - Payments: Monthly or quarterly, sometimes with a balloon - Security: Second lien on business assets (behind SBA loan) - Standby option: No payments for 2 years (common in SBA deals)
Why sellers agree to carry a note: - Enables a larger pool of qualified buyers - May receive a higher total purchase price - Interest income on the note - Tax advantages (installment sale treatment) - Demonstrates confidence in the business's future - Often required by SBA lender to bridge equity gap
Seller financing in SBA deals: The SBA allows seller notes to count as part of the buyer's equity injection IF the note is on "full standby" — meaning no payments of any kind (principal or interest) for at least 2 years. This is extremely powerful:
Example: $1M purchase price - SBA 7(a) loan: $800K (80%) - Seller note (full standby): $100K (10%) - Buyer cash: $100K (10%) - Total buyer equity: $200K (note + cash), but only $100K out of pocket
Negotiating seller notes: - Standard: 10–20% of purchase price - Aggressive: 20–30% (reduces your cash needed) - Interest: Start at 5%, seller may counter at 7% - Term: Longer is better for cash flow; 5–7 years is typical - Standby: Always request full standby for SBA deals - Subordination: SBA lender will require the note to be subordinate to the SBA loan