TL;DR: A seller note can replace cash you don't have, bridge a valuation gap, and keep the seller invested in your success after close. Most ETA buyers treat it as an afterthought. Under SBA SOP 50 10 8 (effective June 1, 2025), the rules on seller note standby periods changed. According to the SBA's Standard Operating Procedures (SOP 50 10 8), sellers who want their note to count toward the equity injection must now accept a full standby for the entire loan term, not just 24 months. Learn the two-note structure that sophisticated ETA buyers use, what to negotiate, and what kills deals.
The tool most buyers misuse
Buyers spend months arguing over EBITDA multiples and SBA draw schedules. Then they treat the seller note as a closing-table afterthought. That backwards. In a lower-middle-market acquisition, the seller note is often the only tool that bridges the valuation gap, satisfies the lender's equity injection requirement, and keeps the seller genuinely invested in your post-close success.
For ETA operators, seller financing is not a backup plan. It is a capital-stack weapon. Used correctly, it reduces your cash-in, lowers your risk, and signals to the seller that this is a partnership, not a cash-out and goodbye.
What seller financing actually is
Seller financing means the seller loans you part of the purchase price. Instead of collecting 100% at close, they receive a promissory note from you as the buyer. You repay that note over time, with interest.
In a typical lower-middle-market deal running from $500K to $3M, the seller note commonly represents 10% to 20% of the purchase price. That portion fills a hole in your capital stack, usually between your equity injection and your senior SBA debt.
Why would a seller agree? Three reasons:
- Tax timing: installment-sale treatment spreads their capital gains across multiple years
- Higher price: sellers who carry paper often command a premium because they make the deal financeable
- Confidence signal: a seller willing to carry a note believes the business will still be healthy when the note comes due
For you as the buyer, seller financing reduces your out-of-pocket capital, often dramatically. On a $1M deal, 10% seller carry means $100K less cash you need to produce at closing.
The SBA rule change that changes everything
Before June 1, 2025, a seller note used to satisfy the SBA's 10% equity injection requirement only needed to sit on full standby for 24 months. After the 24-month standby period, the seller could start receiving principal and interest payments.
SOP 50 10 8 changed that. Any seller note used to satisfy the equity injection requirement must now sit on full standby, with zero principal and zero interest, for the entire term of the SBA 7(a) loan. That is typically 10 years.
This matters. A seller who expected to receive payments starting in year three now receives nothing for a decade. Many sellers will not accept that. The structure that solves this problem is the two-note approach.
The two-note structure
Sophisticated ETA buyers split the seller carry into two notes with different terms.
Note #1 (equity injection note): A small amount, typically 5% of the purchase price, placed on full standby for the duration of the SBA loan. The seller receives nothing on this note until the SBA loan is repaid. This note counts toward your 10% equity injection minimum, reducing your required cash. On a $1M deal, $50K in Note #1 replaces $50K of your own capital.
Note #2 (carry note): A larger amount, typically 10% to 15% of the purchase price, structured with a 24-month standby period followed by standard principal-and-interest amortization over 3 to 5 years. Current interest during the standby period is sometimes permitted, depending on the SBA lender. The seller actually receives payments on this note within a few years of close.
The capital stack on a $1M deal using the two-note structure looks like this:
| Layer | Source | % of Price | Dollar Amount | Key Terms |
|---|---|---|---|---|
| Senior debt | SBA 7(a) | 80% | $800,000 | WSJ Prime + 2.75%, 10-year term |
| Equity injection note | Note #1 (seller) | 5% | $50,000 | 0% interest; full 10-year standby |
| Carry note | Note #2 (seller) | 10% | $100,000 | 7%; 24-month standby, then 5-year amortization |
| Buyer cash | Buyer equity | 5% | $50,000 | Your out-of-pocket at close |
Your actual cash at closing: $50,000. Your purchase price: $1,000,000. The seller note does the rest.
This structure is exactly what search fund acquisition financing looks like in practice, not in theory. Review deal structure mechanics for how this fits into the broader transaction framework.
The subordination language your lender needs
Every SBA lender will require the seller to sign a Standby Creditor Agreement, usually SBA Form 155. Without it, the lender will not advance. Period.
The form confirms four things:
- The seller note is junior to the SBA loan in all respects
- No payments, principal or interest, will be made on Note #1 while the SBA loan is outstanding
- The seller will not take enforcement action against collateral without the SBA lender's written consent
- The seller's lien, if any, is subordinate to the lender's lien
Note #2 requires subordination too, but lighter terms. The lender still wants it behind the SBA loan, and typically requires the 24-month standby period. Whether current interest is permitted during that standby depends on your specific lender's internal policy. Ask before you build the model.
Your M&A attorney should review Form 155 before the seller signs. Do not let the buyer's attorney or lender's counsel be the only eyes on that document. The language matters.
What to negotiate in the seller note
Interest rate: seller notes typically run 6% to 8% in today's rate environment. If the seller pushes above 8%, you have a coverage ratio problem. Model it before you agree.
Standby period on Note #2: the SBA minimum is 24 months. You can negotiate longer if you need breathing room. Sellers who genuinely believe in the business will accept this because they want you to succeed.
Subordination of lien: some sellers insist on a junior lien on business assets as collateral. This is negotiable. Your SBA lender's approval is required for any lien the seller takes. In many deals, the seller takes no lien at all, relying instead on personal guarantee and the subordination agreement.
Acceleration triggers: make sure the seller note includes cure periods before acceleration. A 30-day cure period on missed payments is standard. Anything shorter creates a trap.
Prepayment: include the right to prepay the seller note without penalty. If the business outperforms, you want the option to retire the note early and free up cash flow.
When seller financing fails
Seller financing fails when the seller does not actually believe the business will survive under new ownership. If a seller resists carrying any paper, that is a signal. It does not always mean fraud or a bad business, but it means something.
Common failure modes:
- The seller is in financial distress and needs all cash now. No judgment, but it changes the structure entirely.
- The deal is priced above a multiple the business can support. No seller note fixes a broken unit economics problem.
- The seller's attorney has not seen a two-note structure before and kills it out of caution. This is more common than it should be. Budget time for education, or find a deal attorney with ETA experience.
- The SBA lender is unfamiliar with seller notes and adds requirements that tank the deal economics. Vet your lender before you vet your deal.
Run thorough due diligence on the business before you finalize the seller note structure. A seller note on a business with deteriorating cash flow is not a bridge. It is a liability you signed personally.
The conversation to have with the seller
Most sellers have never heard of SBA Form 155. Most have not sold a business before. When you introduce the seller note in the LOI, frame it in terms of what they get, not what they give up.
Tell them: "I want you invested in my success. If I pay you all cash at close, you walk away and I carry all the risk. If you carry a note, you have a reason to introduce me to your best customers, answer my calls, and help the transition succeed. That makes the note worth more than its face value to both of us."
Sellers who built businesses over decades respond to that framing. They are looking for someone to steward what they built. The seller note is proof you believe in it too.
For further context on how this plays into a full transaction, review our guide on seller financing in acquisitions and how SBA loan terms interact with the note structure.
Action steps
If you are in active deal search or under LOI on a target, do four things this week:
- Read SBA SOP 50 10 8, specifically the sections on seller note standby requirements and equity injection
- Build the two-note structure into your LOI template now, before you are in a live negotiation
- Identify an M&A attorney with ETA or search fund experience in your target market, someone who has seen Form 155 before
- Vet your SBA lender specifically on seller note structures. Ask them: "Have you closed a deal with a two-note seller structure under SOP 50 10 8?" If they say no or hesitate, find a different lender.
The seller note is not a concession you ask for at the end. It is a structure you build from the beginning. Operators who understand this close more deals at better terms than operators who do not.
Frequently Asked Questions
How much of the purchase price can a seller typically finance in an ETA deal?
Most SBA-backed ETA acquisitions use seller notes covering 10% to 20% of the purchase price, split across two notes with different standby terms. The equity injection note is typically 5% on full standby, while the carry note handles the remaining seller paper with a shorter standby period before payments begin.
What changed for seller notes under SBA SOP 50 10 8?
Any seller note used to satisfy the SBA's equity injection requirement must now sit on full standby, with zero principal and zero interest payments, for the entire duration of the SBA 7(a) loan, typically 10 years. Under the prior rule, only a 24-month standby was required. The two-note strategy was developed specifically to address this change.
Can a seller take a lien on the business as collateral for the seller note?
Sellers can take a junior lien on business assets, but it must be subordinated to the SBA lender's lien and requires the lender's approval. Many deals close without a seller lien at all. The seller's primary protection is the personal guarantee from the buyer and the Standby Creditor Agreement, not a collateral position.
What interest rate should I expect on a seller note in 2025 to 2026?
Seller notes typically carry 6% to 8% interest. Above 8%, model it against the business debt service coverage ratio before you agree. Prepayment rights with no penalty should be negotiated into any seller note.
