How Seller Notes Work in SBA Acquisitions

Seller notes are present in the vast majority of small business acquisitions. Some deals are entirely seller-financed. Others use SBA lending for the bulk of the purchase, with the seller note filling a smaller but structurally important role in the capital stack.

The gap between what buyers want and what sellers offer is real. Surveys consistently show that over 60% of buyers want seller financing, while fewer than a quarter of sellers plan to offer it.¹ Buyers hope for 30-40% of the deal financed by the seller. Sellers are comfortable at 10-20%. What actually happens falls somewhere in between - shaped by deal economics, negotiation, and (if SBA financing is involved) the rules of the SBA program.

Everyone apart from the seller tends to want a seller note in the deal. Lenders like it because it keeps the seller's interests aligned with the buyer's success. Buyers like it because it provides additional financing and can improve their debt service coverage. Brokers like it because it gets deals closed. Understanding how seller notes work - and what you can do with them - is table stakes for anyone pursuing an SBA acquisition.

One important clarification: the restrictions and requirements in this article apply specifically to deals using SBA financing. If you're not doing an SBA deal, you have far more freedom to structure seller notes however you and the seller agree. The standby rules, equity injection caps, and compliance requirements we cover here only matter if the deal needs to be SBA-compliant.

Why Seller Notes Exist - Aligning Incentives#

Seller notes solve problems for both sides of the transaction. That's what makes them durable.

For buyers, the benefits are structural. A seller note provides financing beyond what the SBA loan covers. How your seller note strategy interacts with your DSCR is one of the most important structural decisions in the deal. A seller note also signals to lenders that the seller has enough confidence in the business to keep capital at risk. That skin-in-the-game signal matters during underwriting.

For sellers, the pitch is financial. Three arguments carry real weight.

First, higher sale price. Data from Morgan & Westfield across over 10,000 transactions shows businesses that include seller financing sell for 20-30% more than all-cash deals.² The California Association of Business Brokers puts it more precisely: sellers receive approximately 86% of asking price with financing versus 70% for all-cash.³

Second, interest income. Seller note rates have held remarkably steady at approximately 7% across 2022-2026, according to SMB Law Group's data from 370 closed deals.⁴ Despite significant swings in the broader interest rate environment over that period, seller note rates didn't track the market. 7% has become the norm - whether the note is on standby or not - and it beats any deposit account by a wide margin.

Third, tax deferral. Under IRC 453, a seller carrying a note only pays capital gains tax as payments are received - not in the year of sale.⁵ A note on full standby means zero taxable gain from that portion for up to a decade, and spreading income across years can keep the seller below thresholds like the 3.8% Net Investment Income Tax surtax.

As the California Association of Business Brokers frames it: "If a business is truly as good as the seller claims, financing shouldn't be scary."³

What the SBA Allows - Current Rules in Plain English#

The rules governing seller notes in SBA deals have changed multiple times in three years. That instability is part of the story.

SOP 50 10 7 (August 2023 - May 2025) was the most permissive era in SBA lending history. Standby was only 24 months. Seller notes could cover 100% of the equity injection. Many deals closed with structures that are no longer permitted.

SOP 50 10 8 (June 2025 - current) reversed course. The key requirements for complete changes of ownership:

Full standby means exactly what it sounds like. The seller receives zero payments of any kind - no principal, no interest - until the SBA loan is fully satisfied. Interest may accrue during standby, but no cash changes hands until the senior loan is paid off.

The distinction most buyers miss: the full-standby requirement only applies if the seller note is being counted towards the buyer's required equity injection. If the buyer brings 10% in cash from non-seller sources, the equity injection rule is fully satisfied. Any additional seller financing above that threshold can be structured freely - with regular payments, shorter terms, whatever the lender and cash flow support.

This is critical. It means a buyer who can bring 10% cash has far more flexibility in structuring seller financing than one who needs the seller note to count toward equity. Multiple seller notes on a single deal are common for exactly this reason: one on full standby for the equity injection, others with payments beginning at close.

A new SBA SOP is expected in summer 2026 and could change these rules again. Work with an experienced SBA lender and deal attorney who stay current on guidance.

The Practical Playbook#

This is where seller notes stop being a regulatory concept and start being a tactical tool.

Seller Notes and DSCR#

How you structure your seller note directly impacts your debt service coverage ratio. A note on full standby is excluded from the DSCR denominator because no payments are due. That's its most powerful feature. For deals where cash flow is tight, a standby note can be the difference between loan approval and decline.

But it's not all-or-nothing. Notes on partial standby - where payments begin after a deferred period rather than lasting the full life of the loan - may also be excluded from DSCR, depending on your lender. How long a note needs to be on standby for a specific bank to exclude it from DSCR varies. Most require at least two to three years. Get this guidance from your lender early - before you structure your offer - so you don't discover a mismatch after you've already negotiated terms with the seller.

Seller note structure, standby terms, equity injection composition, and real estate amortization all move the same ratio. Work the math before you make your offer.

Multi-Note Structures#

Once you fulfill the equity injection basics, seller notes become a tool for solving negotiation problems. One SBA broker described a recent closing with three separate seller notes on a single deal: one on full standby for equity, a second with payments over 10 years with a balloon at year 5, and a third on standby to cover a shortfall in business valuation.

Three notes on one deal. Each solving a different structural problem. Buyers who understand what's possible can get creative with their offers in ways that serve both parties.

Typical Terms: What the Data Shows#

SMB Law Group's dataset across 370 deals reveals consistent patterns:⁴

• Interest rate: 7% has been the rate on the vast majority of seller notes from 2022 through 2026 - independent of what was happening with Prime or the broader rate environment. Seller note rates aren't indexed to anything. They reflect a negotiated risk premium between two parties, and 7% has become the market standard. This rate applies whether the note is on standby or actively amortizing.
• Maturity: Bimodal distribution. Roughly a third of notes mature at 5 years, a third at 10 years, with the remainder scattered. Standby notes trend toward 10 years (matching SBA loan life). Amortizing notes trend toward 5 years.
• Contingencies: About 20% of seller notes include some form of performance contingency. These aren't random - they're tools for bridging specific risk gaps like customer concentration or valuation disagreements.
• Subordination: Always required. Every seller note in an SBA deal must be fully subordinate to the SBA loan via Form 155. Make sure the seller understands subordination early. Sellers react badly if surprised at closing when you ask them to sign the subordination agreement.

Forgivable Seller Notes#

Classic earnouts - where the purchase price adjusts upward based on post-closing performance - are not permissible under SBA rules. The purchase price must be fixed at closing.

Forgivable seller notes (sometimes called earn-downs) work differently. You can call them whatever you want - what matters is the mechanics. The price is set at closing, but a portion of the seller note can be forgiven or deferred if certain performance thresholds are met. The critical requirement: those thresholds must be based on historical or current business performance, not future growth that hasn't materialized yet. Otherwise it's effectively an earnout and will get rejected.

Examples of permissible forgiveness triggers:

• Retaining all of the top five existing clients over the first two years
• Maintaining annual revenue at or above $3M

A forgivable seller note adjusts the note downward - never upward. Structure it around metrics the seller can't dispute, like revenue rather than net income, and make sure your attorney documents it as a purchase price reduction rather than forgiveness of indebtedness. The tax treatment matters.

Seller Note Scenarios - What's Possible Under Current SOP#

The following table shows permissible structures on a $2M deal. Keeping the deal size constant makes it easier to compare how different structures change the capital stack. These aren't theoretical - they reflect the types of configurations practitioners regularly close.

The variety is the point. Seller notes aren't a single instrument - they're a category of tools that can be configured differently depending on what problems need solving.

That said, don't overcomplicate things. The goal isn't to get fancy with three or four notes on every deal. The goal is to get the deal done in the best way possible, and that's often a blend of creative structuring and simplicity. Use the structure that solves the actual problem you're facing - nothing more.

Structure the Note Before You Need It#

Seller notes aren't something to figure out at the closing table. By the time you're negotiating final terms with the seller, your lender, and your attorney, the note structure should already be part of your thesis for how the deal works.

Before you submit an LOI, understand what your lender requires for standby, how different note structures affect your DSCR, and what the seller is likely to accept. Know whether you're bringing enough cash to avoid the standby requirement entirely, or whether you need the note to count toward equity injection. Think about whether a forgivable component makes sense for the specific risks in this deal.

The sellers who agree to carry paper are the ones who understand why it's in their interest. Higher sale price. Interest income at 7%. Tax deferral that can save tens of thousands. If a seller won't carry a note, that tells you something about their confidence in the business.

And the buyers who structure notes well are the ones who understand the full range of what's possible - not just the standard 80/10/10. A single standby note is fine for a straightforward deal. But when you need to solve for tight cash flow, a valuation gap, or customer concentration risk, having more tools in the kit gives you more ways to get the deal done.

Sources#

Footnotes#

1. BizBuySell, Q2 2025 Insight Report. Survey of business buyers and sellers on financing preferences. ↩

2. Morgan & Westfield, analysis of 10,000+ business transactions on seller financing premiums. ↩

3. California Association of Business Brokers (CABB), seller financing statistics and risk framing. ↩ ↩²

4. SMB Law Group / SMBash, "State of ETA" presentation, 2026. Dataset: 370 closed deals over 4 years, approximately $2B deal volume, 40 states. ↩ ↩² ↩³

5. IRS Publication 537 (2025), Installment Sales; 26 U.S.C. 453. ↩