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Financing the Deal: SBA Loans, Earnouts, and Seller Notes

by Darren on
Perspectives

Most small- to mid-market business acquisitions aren’t paid entirely in cash. Deals are financed through a mix of:

  • Bank or SBA loans (secured by business assets and buyer equity)

  • Seller financing (the seller carries a note for part of the price)

  • Earnouts (future payments tied to performance)

  • Equity rollovers (seller keeps a minority stake)

Each option has trade-offs in speed, certainty, and risk. The best structure depends on the buyer’s resources, the business’s stability, and the seller’s comfort level with ongoing involvement.

When the Money Gets Real

By the time you reach deal financing, the buyer believes in your business — now they need to prove they can pay for it.

In lower-middle-market and main-street transactions, cash-only closings are rare. Most involve some form of financing, often with the seller playing a part.

For owners new to M&A, this stage can feel uncertain:

  • What if the bank doesn’t approve the loan?

  • What does “seller financing” actually mean?

  • How do earnouts really work?

At Sixty74, we help sellers understand how money moves in a transaction — so they can negotiate confidently, protect cash flow, and close without surprises.

The Typical Deal Stack

While every deal is unique, most financing packages look like this:

Source % of Price Who Provides It Notes

Buyer Equity

10–25%

Buyer

Required “skin in the game.”

Bank / SBA Loan

50–90%

Lender

Requires collateral and buyer credit.

Seller Note

10–20%

Seller

Paid over time with interest.

Earnout

0–20%

Business Performance

Contingent on future results.

The exact mix depends on risk profile, buyer capital, and lender requirements.

SBA Financing: The Backbone of Many Deals

How It Works

The Small Business Administration (SBA) doesn’t lend directly — it guarantees a portion of loans made by banks. This reduces lender risk and enables financing for acquisitions that traditional banks might not approve.

Common SBA Programs

  • 7(a) Loan: The most used for business acquisitions.

  • 504 Loan: Often used for equipment or real estate heavy businesses.

Typical Terms

  • 10-year amortization for goodwill; up to 25 years for real estate.

  • 10–20% down payment (buyer equity).

  • Interest rates are around Prime + 2.75%.

What Sellers Should Know

  • Expect a 45–90 day approval timeline.

  • Lenders require tax returns, P&Ls, AR/AP aging, and debt schedules.

  • The business must have a strong cash flow to service the debt.

  • Buyers often ask sellers to carry a small note (5–10%) — a requirement in many SBA deals.

Pros for Sellers:

  • The bank funds most of the purchase price.

  • Strong buyer vetting and structure oversight.

Cons:

  • More paperwork and timeline uncertainty.

  • The SBA may scrutinize add-backs or non-recurring expenses.

Seller Financing: Bridging the Gap

When a buyer can’t secure full bank financing — or when the seller wants to show confidence — seller financing fills the gap.

What It Means

The seller agrees to defer a portion of the purchase price and act as the lender. The buyer signs a promissory note outlining repayment terms, interest rate, and collateral.

Typical Terms

  • 10–30% of the total purchase price.

  • 5–8% interest.

  • 3–10-year repayment term.

  • Secured by business assets or subordinate to bank debt.

Benefits to Sellers

  • Expands the buyer pool.

  • Often speeds up deal approval.

  • Generates steady post-sale income with interest.

Risks to Sellers

  • Payment default if the business underperforms.

  • Need to monitor repayment schedule.

Protect yourself:

  • Obtain a personal guarantee from the buyer.

  • File a UCC lien.

  • Limit exposure (never more than you’re comfortable lending).

Example: A seller carried 15% of a $3M transaction at 6% interest. Payments over five years added $240K in interest income — nearly 8% extra value.

Earnouts: Tying Value to Future Performance

What They Are

An earnout pays part of the purchase price only if the business hits agreed-upon targets post-close — usually revenue, EBITDA, or customer retention.

Common Structure

  • Measured over 12–36 months.

  • Paid annually or quarterly.

  • Based on clear, auditable metrics.

Pros for Sellers

  • Capture upside if the business grows.

  • Bridge valuation gaps with optimistic buyers.

Cons for Sellers

  • Depends on the company's performance.

  • Risk of disputes over definitions (“adjusted EBITDA,” etc.).

Tips

  • Keep metrics simple and clearly defined.

  • Negotiate audit rights to verify results.

  • Ensure the buyer can’t manipulate reporting.

Earnouts can be powerful, but they require trust and precise drafting.

Equity Rollovers: Keeping a Foot in the Door

In some transactions, sellers retain minority ownership (often 10–30%) after closing.

Why Sellers Do It:

  • Believe in future growth under new ownership.

  • Align incentives with the buyer.

  • Potential for a “second bite of the apple” on resale.

Why Buyers Like It:

  • Keeps the seller engaged and motivated.

  • Reduces upfront cash needs.

Key Considerations:

  • Clarify governance rights — can you influence major decisions?

  • Understand dilution and exit timeline.

  • Ensure a clear mechanism for your eventual payout.

How Financing Structures Affect Timing and Risk

Type Seller Cash at Close Timeline Risk to Seller Use Case
SBA / Bank Loan
High
45–90 days
Low
Strong cash flow businesses
Seller Note Medium 30–60 days Medium Bridge funding gaps
Earnout Variable 12–36 months High Growth or turnaround potential
Equity Rollover Low initial, future upside 12–48 months Medium–High Seller believes in long-term growth

Key takeaway: The more deferred payment structures you accept, the more risk you carry — but also the greater the potential upside.

How to Protect Yourself as a Seller

  1. Do your own due diligence on the buyer. Review their credit, business history, and financing plan.

  2. Document everything. Promissory notes, personal guarantees, and repayment schedules should be lawyer-drafted.

  3. Negotiate default protections. Late fees, acceleration clauses, collateral.

  4. Stay involved until payments are complete. Periodic updates help ensure stability.

  5. Hire advisors who’ve closed financed deals. The mechanics are complex — experience matters.

Emotional Reality: Trust but Verify

When financing enters the picture, deals hinge on trust. You’re not just selling — you’re lending.

That’s why Sixty74 favors transparent, stewardship-driven buyers who value continuity. Financing should enable growth, not strain relationships.

The Bottom Line: Know How the Money Flows

Every deal looks a little different — but every seller should know where the money comes from, when it arrives, and what strings are attached.

Whether it’s SBA financing, a seller note, or an earnout, structure matters as much as price. The right mix creates stability for both sides — and helps you exit on terms that protect your hard-earned value.

If you’re interested in selling your business, let’s talk.

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