The seller you want most is the one who offers to finance part of the deal.
According to Morgan & Westfield's analysis of more than 10,000 transactions, 60–80% of small business sales include seller financing in some form. Fewer than 10% of small businesses sell for all cash. The buyer who understands how seller notes work gets more deals done at better terms than the buyer who treats financing as a nuisance to minimize.
This is the operator's guide to seller notes: what they are, why sellers agree to them, how the June 2025 SBA rule changes shifted the math, and where the real risk sits for both sides.
What a seller note actually is
The seller holds a promissory note for a portion of the purchase price. You pay that note back over time, with interest, directly to the seller, not through a bank.
The note is documented formally: principal, interest rate, payment schedule, and collateral (typically a UCC lien on business assets). The seller becomes a subordinated lender in your capital stack. That means they get paid after the bank. Always.
Standard structure in the lower middle market: seller notes represent 10–20% of the total deal price. Interest runs 6–8% fixed. Terms range from 3–7 years on non-SBA deals. On SBA-financed acquisitions, the note term must equal or exceed the SBA loan term, often 10 years or more.
Why sellers agree to it
The answer is financial, not sentimental.
Sellers who offer financing receive approximately 86% of asking price on average, versus about 70% for all-cash deals, per Morgan & Westfield's data. The seller note commands a higher headline number. That's the starting point.
On top of that: installment sale treatment under IRS Publication 537 and IRC Section 453 means the seller reports capital gains proportionally as payments come in, not all at close. If the sale creates a $3M gain and the seller receives 20% of the price per year, they report 20% of the gain each year. That keeps the seller in a lower tax bracket year over year, versus a lump-sum recognition that pushes them into the highest federal bracket in a single year.
The caveat: depreciation recapture gets taxed in the year of sale regardless of installment structure. Non-negotiable. But for sellers with substantial goodwill value and low basis, the installment route frequently produces more after-tax proceeds than the all-cash alternative, even accounting for subordination risk.
What changed in June 2025
Until June 1, 2025, sellers and buyers used seller notes aggressively in SBA 7(a) financed acquisitions. Under the 2023 SBA rules (SOP 50 10 7), a seller note on 24-month standby could satisfy the entire 10% equity injection requirement, enabling a structure with effectively zero buyer cash at close.
That's gone.
Under the current rules (SOP 50 10 8, effective June 1, 2025), the seller note can count toward the equity injection only if: (1) it's on full standby for the entire life of the SBA loan, and (2) it covers no more than 50% of the required injection, a maximum of 5% of total project cost. The buyer must contribute at least 5% cash.
On a $3M acquisition, that's $150K minimum out of pocket. Better than $300K, but not zero.
The practical impact: 41.3% of business brokers reported deal delays following the June 2025 change in a BizBuySell survey. Transactions that assumed a zero-cash-down structure had to be restructured. Sellers who wanted all-cash terms gained negotiating leverage.
If you're financing an acquisition with an SBA 7(a) loan in 2026, understand this upfront: the seller note structure that circulated in ETA communities two years ago has changed. Model your deal against the current SOP before you make an offer.
The capital stack in practice
A representative acquisition for a search fund operator or self-funded searcher: a business with $1.2M in EBITDA selling at 4.5x, $5.4M purchase price.
| Component | Amount | % of Deal | Notes |
|---|---|---|---|
| SBA 7(a) loan | $4.0M | 74% | 10-year term; buyer personally guarantees |
| Seller note (full standby) | $810K | 15% | Counts as 50% of equity injection under June 2025 rules |
| Buyer cash | $590K | 11% | Satisfies remaining equity requirement |
That seller note on full standby means the seller receives $810K over 10+ years instead of at close. Their net proceeds at close are $4.59M versus $5.4M all-cash. The buyer closes a $5.4M deal with $590K out of pocket instead of a conventional equity injection that might require $1M or more.
This is why search fund capital structures consistently include seller notes. The 2024 Stanford Search Fund Study, covering 681 search funds since 1984, explicitly identifies seller financing as a standard component of acquisition capital stacks alongside equity and senior debt. Median acquisition price across the study: $14.4M. These are not small deals, and seller notes are present in the majority.
The seller's actual risk
The seller who holds a note is a subordinated lender. In a default or liquidation scenario, the SBA lender gets paid first from all available business assets. The seller recovers what's left, which can be nothing.
Most seller notes in SBA deals include a standstill provision: the seller cannot pursue collateral, call the note, or take legal action without the SBA lender's written consent. The seller signed a Standby Creditor's Agreement at close. If they receive any payment during a standby period and don't return it to the lender within 15 days, they've breached that agreement.
The seller's protections: a UCC lien on business assets, a personal guarantee from the buyer if negotiated, and the contractual requirement that the buyer maintain the business during the note term. None of these are worth much in a hard liquidation. Sellers who accepted notes during the 2021–2022 acquisition cycle and saw post-pandemic businesses decline have experienced this firsthand.
The buyer's actual risk
The seller note adds debt service. If you modeled your DSCR at 1.25x and the seller note's amortization tips you below covenant thresholds, the bank can restrict distributions, trigger reporting requirements, or call a technical default.
Standby notes don't hit DSCR. That's their structural advantage. Active payment notes do. A 15% seller note on a $5M deal at 7% over 5 years adds roughly $118K per year in debt service. On a business generating $1.2M EBITDA with $400K in SBA debt service, that moves a 2.1x DSCR to 1.8x. Small differences at this level matter when the business has a slow quarter.
When a business underperforms, seller note payments typically suspend before SBA payments do. The subordination agreement makes this automatic. Interest accrues. The seller knows this going in, which is part of why they demand a higher purchase price to compensate for the risk.
What to negotiate
Four terms matter most.
Standby vs. active payments. Full standby gets you the equity injection credit under SBA rules but means the seller waits years for cash. Partial standby or active payments hits your DSCR immediately. Understand the tradeoff before you write the LOI.
Acceleration clauses. Most notes include events of default that trigger full repayment acceleration: business sale, bankruptcy, covenant breach, missed payments. In SBA deals, acceleration requires lender consent. Negotiate the definition of default carefully. Overly broad clauses become negotiating leverage against you in any dispute.
Subordination and standstill. This language should be in the note from day one. Any seller who resists formal standstill provisions is a structural red flag. The SBA lender will require it anyway. There is no avoiding it in an SBA-financed deal.
Prepayment rights. The right to prepay without penalty is worth negotiating. If the business performs and you want to clean up the capital structure at year three, you don't want to be locked into a seven-year note.
The bottom line
A seller who offers a note is not doing you a favor. They're optimizing for their own tax situation and maximizing their price. You're optimizing for capital efficiency and transition support. When those interests align, deals close.
Sixty to eighty percent of small business sales include seller financing. The buyers who close those deals understand the mechanics. The buyers who don't get outmaneuvered at the term sheet stage.
Search fund due diligence surfaces the business risk. The seller note structures the financial risk. Know both before you sign.
Jeff Barnes is a partner at Patriot Growth Capital, a veteran-founded private equity firm based in Atlanta, GA. PGC donates 5% of revenue to the veteran community and is affiliated with ATLVets.
