Quick update before we dive in – we've been busy!

35 clients, 36 closed acquisitions, nearly $82 million in SBA financing so far this year.

Pretty wild to think about all those entrepreneurs who are now business owners thanks to some smart deal structuring and a lot of hard work.

We're also adding another M&A Financial Analyst to the team in October, bringing us to nine people. Not just because we're swamped (though we are), but because we want to keep giving every deal the attention it deserves.

Speaking of staying busy, we've got some exciting conferences coming up.

I will be speaking at the Rice ETA Conference on October 17th – if you're thinking about entrepreneurship through acquisition, it's worth checking out. You can find the sign up link here.

I'll also be presenting at the Booth-Kellogg Entrepreneurship Through Acquisition Conference – sign up link here.

Both events are great opportunities to connect with other buyers, sellers, and industry professionals who are serious about M&A.

If you're planning to attend either conference or just want to chat about a deal you're working on, feel free to schedule some time with our team.

Now, let's talk about something that comes up in almost every deal conversation: seller notes in SBA financing. This stuff matters way more than most people realize.

The Real Story Behind Seller Notes

Here's the thing the SBA wants you to know: they don't require seller notes.

You can absolutely finance a deal without them. But here's what they don't tell you in the rulebook:
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Try finding a lender who'll do 90% financing without some seller skin in the game these days. Good luck with that.

The SBA has been pretty clear about why seller notes work so well in their program.

When sellers agree to finance part of the purchase price, they're essentially putting their money where their mouth is. They're telling the lender, "Yeah, I believe this business will perform well enough under new ownership that I'm willing to bet my own money on it."

That confidence signal is huge.

The SBA has noted in their guidance that this alignment between buyer and seller often reduces default risk because everyone has incentives aligned properly. The seller wants the business to succeed so they get paid back. The buyer wants it to succeed for obvious reasons. And the lender sees that shared commitment.

What's changed in recent years?

Credit standards have definitely tightened up.

The SBA's own data shows that lenders are being more selective, and seller notes have become one of the key tools for getting deals across the finish line.

Form 155: The Document That Controls Everything

Every seller note in an SBA deal needs SBA Form 155 – the Standby Creditor's Agreement. This isn't just paperwork; it's the legal framework that makes the whole thing work from the SBA's perspective.

The SBA designed Form 155 with very specific protections in mind. Here's what they require:

Payment Structure Options – The seller has to pick one of four ways to get paid:

• No payments at all until the SBA loan is completely paid off
• Interest-only payments (until the SBA lender says stop)
• Principal and interest payments (unless the lender orders them to stop)
• Principal and interest starting on a specific future date

The Return Rule – If the seller gets a payment they're not supposed to receive, they have 15 days to hand it over to the SBA lender. No exceptions.

No Enforcement Rights – This is a big one. While the SBA loan is outstanding, the seller can't sue the borrower, can't go after collateral, can't enforce the note at all. They're essentially a silent partner financially.

Collateral Subordination – Any security interest the seller has gets subordinated to the SBA lender. The SBA lender comes first, period.

Lender Flexibility – The SBA lender can modify the loan, defer payments, release collateral, or work out problems without affecting the standby agreement.

Binding on Everyone – The agreement doesn't just bind the original seller. It applies to successors, assignees, bankruptcy trustees, guarantors – basically anyone who might end up holding that note.

The SBA built these protections because they learned from experience. They've seen what happens when seller financing undermines SBA loan repayment, and they designed Form 155 to prevent those problems.

How the Equity Rules Changed (And Why It Matters)

This is where things get really interesting. The SBA completely rewrote the equity injection rules, and the changes tell a story about where the program is headed.

The Old Way (SOP 50 10 7.1) Under the previous rules, buyers had a lot more flexibility. You needed 10% equity, but seller notes could help you get there if:

• No balloon payments
• Full standby for at least 24 months, OR
• Partial standby with interest-only payments (if cash flow supported it)

The catch was that at least 25% of your equity had to come from somewhere other than the seller. But still, this gave buyers with limited cash some real options.

The SBA's reasoning was pretty straightforward – they wanted to encourage business ownership while maintaining reasonable risk controls.

The New Way (SOP 50 10 8) Then everything changed in June 2025. The new rules are much stricter:

• Seller notes only count toward equity if they're on full standby for the entire life of the SBA loan
• Maximum 50% of your equity injection can come from a seller note
• The other 50% has to be real cash or other qualifying sources
• Lenders must verify equity contributions with bank statements, canceled checks, or wire confirmations

According to the SBA's guidance, this change was driven by two main factors: reducing default risk and strengthening lender confidence. They basically decided that too many buyers were getting into deals without enough real cash commitment.

The message is clear – the SBA wants buyers who have genuine financial skin in the game, not just creative paper structures.

Multiple Seller Notes: The Practical Solution

Here's something that surprises a lot of people – the SBA absolutely allows multiple seller notes in one deal. In fact, their guidance acknowledges that this is often the most practical way to structure things.

The SBA's position is that as long as each note is properly documented and subordinated, you can have:

• Note A: A fully standby note that counts toward equity (remember, max 50% of equity)
• Note B: A separate note that doesn't count toward equity but might allow interest payments or have performance contingencies

This dual-note approach has become increasingly common because it balances everyone's needs. The seller gets some financial involvement post-closing, the buyer meets SBA equity requirements, and the lender gets the protection they want.

The SBA has been pretty supportive of this structure in their guidance, recognizing that it often makes deals work that otherwise wouldn't.

Contingent and Performance-Based Notes

The SBA has gotten more specific about contingent or forgivable notes, and their position is pretty clear: these can be useful tools, but they can't count toward equity.

Common structures the SBA sees include:

• Notes that only require repayment if certain sales targets are hit
• Forgivable notes tied to business performance benchmarks
• Earnout-style arrangements based on profitability

The SBA's guidance emphasizes that these instruments need to be completely separate from equity-eligible notes. They must be fully subordinated under Form 155, and they can't be used to satisfy the 10% equity injection requirement.

Why does the SBA make this distinction? Because they want the equity injection to represent true, committed capital. Contingent notes, by definition, might never be repaid, so they don't provide the same risk-sharing benefit.

Why the SBA Tightened the Rules

The SBA has been pretty transparent about why they moved from the more flexible SOP 50 10 7.1 to the stricter SOP 50 10 8. Their internal analysis showed two main concerns:

Default Risk Reduction – Data showed that deals with higher cash equity injections had better performance. By requiring more real cash, they're trying to ensure buyers have genuine financial commitment.

Lender Confidence – The SBA heard from lenders that the previous rules created too much ambiguity. Credit committees were having trouble evaluating deals consistently. Clearer rules mean more predictable lending decisions.

There's also a broader policy consideration. The SBA program exists to facilitate business ownership, but it has to be sustainable. Tighter equity requirements help ensure the program can continue serving entrepreneurs long-term.

What Actually Goes Wrong (And How to Avoid It)

Based on what we see in the market, here are the most common seller note mistakes:

Over-Reliance on Seller Financing – Buyers sometimes assume seller notes can cover most of their equity needs. Under current SBA rules, that's just not possible anymore. Plan for significant cash equity.

Documentation Problems – The SBA requires solid documentation of equity sources. Gift letters won't cut it. Promissory notes aren't enough. Lenders need to see actual cleared funds with proper paper trails.

Seller Expectation Misalignment – Many sellers expect to start getting paid back quickly. Form 155 makes that impossible unless the lender specifically approves it. Set expectations early.

Mixing Note Types – Trying to use a contingent or performance-based note toward equity won't work. The SBA is clear that these must be separate structures.

Poor Timing – Bringing up seller note requirements late in the process creates problems. These discussions need to happen early.

Practical Guidance for Buyers

If you're working on an acquisition, here's what actually works:

Start the Conversation Early – Don't wait until you're deep in due diligence to discuss seller financing needs. Bring this up during initial negotiations.

Be Clear About SBA Requirements – Many sellers don't understand Form 155 restrictions. Explain what full standby means and how it affects their expectations.

Plan Your Capital Stack Carefully – Assume you'll need at least 50% of your equity in real cash. Plan accordingly.

Document Everything Properly – Work with your lender to understand their specific documentation requirements. Every bank has slightly different standards.

Consider Multiple Note Structures – If the seller wants some financial involvement post-closing, explore dual-note structures that comply with SBA rules.

Verify Equity Sources Early – Make sure you can properly document all equity sources with bank statements and cleared funds.

The Bottom Line

Seller notes aren't required by SBA rules, but they've become essential tools in today's market. The key is understanding what the SBA actually says about them and structuring deals accordingly.

The updated SOP 50 10 8 sends a clear message: equity must be real, verifiable, and meaningful. Seller notes still work, but they have to be done right – properly documented, fully subordinated, and within the SBA's guidelines.

The good news?

When seller notes are structured correctly, they create real value. They align interests between buyers and sellers, give lenders confidence, and often make the difference between deals that close and deals that don't.

Every situation is different, but the SBA's guidance gives us a clear framework to work within. The key is understanding those rules and using them to create structures that work for everyone involved.

Thanks for reading, and as always, reach out if you want to talk through how this applies to your specific situation.

Ready to Have a Real Conversation About Business Buying?

If you're serious about acquiring a business and want to work with people who'll give you the straight truth (not social media fantasies), we'd love to connect with you.

For pre-LOI buyers ready to explore opportunities: Schedule a meet & greet call​

Already have a deal under LOI and need financing help: Schedule an LOI consultation​

Got questions or just want to chat? Drop me a line directly at matthias@pioneercap.com​

Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

Thanks for reading! Feel free to reply directly to this email with any questions or thoughts.