Chicago ETA Happy Hour

Join us in person at Randolph Tavern (188 W Randolph Street, Chicago, IL 60601) on Thursday, July 16 from 4:30 to 7:00 PM.

Pioneer Capital Advisory is co-hosting alongside Grant Hensel (Entrepreneurial Capital) and Alex Hinch (Rejigg); an ETA investor, an acquisition-financing team, and an ETA deal marketplace in one room.

Appetizers are on us; drinks are available for purchase. Whether you are just exploring, full-time searching, or already under LOI, come meet the team and other serious buyers.

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The Seller Note Playbook

The single most important line in your capital stack, the SBA rule that quietly kills rollover deals, and how the structures that actually close are really built.

Every few weeks I go back through my call notes and ask a simple question: what are buyers actually wrestling with right now? Not what I assume they are worried about, what they are genuinely stuck on. I did that exercise again before sitting down to write this, looking across roughly twenty buyer and seller conversations from the last two months.

The answer was not subtle.

14 of those 20 conversations came back to the same two words: seller note.

Not as a footnote. As the hinge the entire deal turned on. How big it needs to be. Whether the seller will agree to one at all. Whether it sits on standby. How it interacts with the buyer's equity injection. And on eight of those calls, a specific SBA rule change from last summer that turns a cooperative seller into a reluctant one the moment they understand what it actually asks of them.

So this issue is the seller note, start to finish. What it does, how to size it, how to structure the amortization and the balloon, which banks will walk away without one, the rollover trap that is killing deals before anyone notices, and two real structures I built recently so you can see exactly how the pieces fit together.

Why the seller note stopped being optional

There was a time when a seller note was a nice gesture. A way to bridge a valuation gap, or a signal from a seller who believed in the business. That era is over. In today's SBA environment the seller note is closer to a requirement, and on a meaningful share of deals it is the difference between a bank saying yes and a bank not returning your call.

Here is the blunt version I gave a buyer last month, almost word for word:

If you cannot get a seller's note for somewhere in the neighborhood of 5% of transaction value, the universe of banks you are dabbling in gets very thin, very fast.

Some of the most active SBA acquisition lenders in the country will not touch a deal at all without one, because they have decided the note de-risks the transaction and they want to see the seller carry a piece of it. A buyer on a recent electrical-contracting deal ran straight into this: the lenders he most wanted were precisely the ones that flatly require seller paper.

That is the demand side, coming from the bank. The supply side, coming from the seller, is where deals quietly break, and it now hinges on a rule most first-time buyers have never heard of.

The trap: rollover equity and the two-year personal guarantee

This is the single most-repeated pain point across my calls this spring, and almost no buyer sees it coming.

Picture the setup. You are buying a business and the seller agrees to stay in for a slice, rolling some of their equity into the new company rather than cashing fully out.

On paper it is perfect: continuity for the customers, alignment for the bank, and a seller who clearly believes in what they built. Everyone shakes hands. Then the seller's attorney reads the SBA file, and the warmth drains out of the room.

Under SOP 50 10 8, effective June 1, 2025, the SBA closed a loophole that used to exist. It used to be that a seller who retained less than 20% of the business could stay in the deal without personally guaranteeing the buyer's loan. That door is now shut. Any seller who retains even a sliver of equity in the operating company must personally guarantee the 7(a) loan for the later of two years after final disbursement, or until the loan has been current for twelve consecutive months.

Read that again from the seller's chair. They thought they were selling their business and stepping back. Instead they are being told they remain personally on the hook for a multi-million-dollar loan that is now mostly in someone else's hands, for at least two years. One buyer put it to me plainly after his seller balked: that requirement is a flat-out showstopper for many sellers.

Here is why this matters to you, the buyer. If your structure leans on the seller rolling equity, you need to surface the personal-guarantee requirement on day one, not in week six when the lawyers find it and the seller feels ambushed. The buyers who lose these deals are the ones who let the seller fall in love with the rollover idea before anyone explained the string attached.

The buyers who win them do one of two things:

• They price the guarantee into the negotiation early and honestly
• or they restructure around it, most often by replacing rollover equity with a seller note, which carries no equivalent personal-guarantee trap.

That pivot, from rollover equity to a properly structured seller note, is exactly why the note has become the workhorse of the modern SBA acquisition. So let's build one correctly.

The seller note as your equity-injection engine

Most SBA acquisitions require the buyer to put in a 10% equity injection of total project cost. Here is the part first-time buyers consistently miss, and it is worth real money: you do not have to write that entire check yourself.

A seller note structured on full standby, meaning no payments of principal or interest for the life of the SBA loan, can count toward your required equity injection, up to half of it. In practice that means a seller note worth roughly 5% of the project, on full standby, can stand in for half of your 10% injection. You bring 5% in cash, and the seller's standby note covers the other 5%.

This is the mechanical reason seller notes cluster where they do. The shape that closes again and again looks like this:

That full-standby feature is not a detail. It is the whole point. A note that requires payments does not count toward your injection, and worse, those payments eat into the very cash flow the bank uses to size your loan. Full standby keeps the note working for you on both sides of the ledger.

One more thing buyers should ask about before they commit, because it varies bank to bank: how the lender allocates your equity injection and seller note is not uniform. Some banks allocate aggressively to maximize your loan term; others take a conservative view. It is one of the most valuable questions you can put to a lender early, and one of the better reasons to keep more than one bank looking at your deal.

What this looks like in dollars

Buyers tell me the mechanics finally click when they see the numbers laid out, so here is a simplified sources and uses for a clean $2 million acquisition. I have stripped out closing costs and working capital to keep the illustration easy to follow.

The buyer's required equity injection on this deal is $200,000, or 10% of the project.

Without the seller note, that entire $200,000 comes out of the buyer's own pocket. With a $100,000 seller note on full standby, the buyer writes a check for $100,000 instead, and the seller's standby note satisfies the other half.

Same loan, but the buyer keeps an extra $100,000 of personal liquidity for life after close, which is exactly the cushion lenders like to see a new owner sitting on.

If the seller is willing to carry more than the minimum, say a note worth 10% or 15% of price, the extra simply sits as additional standby paper behind the bank debt, which strengthens the file further. The first 5% is what does the equity-injection work; anything above that is a bonus the bank reads as conviction.

Amortization and balloons: getting the structure right

Once the seller agrees to carry a note, the structure of that note matters as much as its size. Three rules of thumb that recur on nearly every structuring call:

Match the amortization to the loan, not to the seller's patience. Most banks want to see at least seven to eight years of amortization on the seller's note, even when there is a balloon sooner. The logic is simple and worth saying out loud to a seller who pushes back: if the bank is lending 70 to 80 cents on the dollar, why should the seller get paid back faster than the bank? A note that amortizes too quickly looks like a disguised down payment and invites scrutiny.

Push any balloon past year three. If you are using a balloon to give the seller an earlier exit, set it to land at the end of year three or later. Balloons inside the first three years draw harder questions from underwriting and can complicate the standby treatment. A balloon at year four on an eight-year amortization is a clean, common, defensible shape.

Use the standby deliberately. Full standby is what lets the note count toward your equity injection. Partial standby exists, but since the guidelines shifted to allow it, it has lost much of the cachet it once carried, and it does not earn you the equity-injection credit. If the goal is to cover part of your injection, the note has to be on full standby. Full stop.

A couple of examples from real deals

I find it helps to see how this actually plays out, so let me walk you through two structures I have put together recently. I have kept the details anonymous, but the shapes are real.

The first one is the bread and butter version, and it is the one I wish more first time buyers understood going in. I had a buyer acquiring a services business priced right around $2 million.

The seller was glad to stay involved through the transition and agreed to carry a note for 10% of the purchase price, at 7% interest, on full standby for the entire life of the SBA loan, amortized over the same term as the loan itself.

The good news here is that because the note was on full standby, with no principal and no interest due for the life of the loan, half of the buyer's required equity injection was covered by that note. So instead of writing a check for the full 10% of the project out of his own pocket, my buyer only needed to bring 5% in cash. The seller stayed invested in the handoff, the bank loved the structure, and the buyer kept a meaningful amount of his own liquidity for after close.

Clean and simple, and it is the template I reach for first on a healthy business.

The second one is more interesting, and it is a good example of what happens when the business itself needs the seller to carry more weight. This was a manufacturing company that had been through a rough patch and was working its way back. The bank was willing to get to the finish line, but the short version is that they wanted to see real skin in the game from the seller before they got comfortable.

So we built a seller note for close to 40% of the purchase price. We amortized it over eight years to keep the monthly number reasonable against the cash flow of the business, we put it on full standby for the first two years so it would not compete with the bank debt while the buyer found his footing, and we set a balloon at year four so the seller had a clearly defined runway to be paid in full. That structure gave the bank the cushion it needed to say yes, and it still gave the seller a real path to their money on a timeline they could live with.

One last thing worth mentioning, since it comes up a lot. A true earn out does not work with SBA financing. If you are trying to bridge a gap between what the seller thinks the business is worth and what it can actually support, the closest tool you have is a forgivable or contingent seller note, where the note gets forgiven or paid based on the business hitting agreed targets. It is not quite an earn out, but on the right deal it gets you most of the way there while staying inside the SBA box.

Which banks actually require a seller note

Not every lender treats the seller note the same way, and knowing the map saves you weeks of wasted outreach. In broad strokes from what I am seeing close right now: some of the most active national SBA acquisition lenders will not do a deal at all without a seller note, because they have built it into their credit box as a non-negotiable. Others are more flexible but will price or structure around its absence, often by asking for more buyer equity instead.

This is precisely why you want your deal in front of several lenders at once, not just the first bank that returns your email. On a recent non-SBA-vertical deal, our team contacted dozens of lenders to find the handful whose appetite actually fit the structure the buyer could negotiate.

On a typical SBA acquisition the number is smaller, but the principle is identical: competing term sheets are how you find the lender whose seller-note requirements match your deal, and how you avoid contorting the entire transaction to satisfy the only bank you bothered to call.

How to actually have the seller-note conversation

The structure is the easy part. The hard part is sitting across from a seller who has just been told they need to carry paper, and walking them through why it is in their interest, not just yours. Most deals that die over the seller note die here, in the conversation, not in the underwriting. Three objections come up again and again, and each one has a real answer.

“Why should I finance the buyer? I want my money at close.” This is the most common one, and the honest framing usually lands: the seller note is often what makes the bank willing to fund the rest of the deal at full price. A seller who insists on 100% cash at close frequently ends up taking a lower headline number from a buyer who cannot use SBA leverage, because the all-cash universe of buyers is smaller and pays less. A modest standby note is frequently the price of getting to the higher valuation, not a discount on it. Framed that way, the note looks less like a concession and more like the thing protecting the seller's number.

“What if the business struggles and I never get paid?” Full standby genuinely does mean the seller sits behind the bank, and that is a real consideration worth naming honestly rather than glossing over. The counterweight is that the seller is choosing the buyer they hand the business to, and a well-capitalized buyer with their own cash in the deal and liquidity after close is exactly the profile most likely to make that note good. The seller note also keeps the seller economically interested in a clean transition, which tends to be self-fulfilling: a smooth handoff is what keeps the business healthy enough to service everything.

“I don't want to be on the hook with the SBA for two years.” This is the rollover-guarantee issue from earlier in the issue, and it is worth separating clearly for the seller. A seller note is not the same thing as rolling equity. A straight seller note does not, by itself, put the seller back on a personal guarantee the way retained ownership does. If the seller's real fear is the two-year guarantee, the seller note is often the structure that lets them participate in the deal and get paid over time without stepping into that trap. Drawing that distinction in plain language has saved more than one deal on my calls this year.

One practical note for the seller's own planning, and one they will appreciate you raising: the interest they earn on the note is taxable income to them, and the installment nature of the note can actually spread their gain over several years rather than bunching it into one. That is a conversation for their CPA, not for you to advise on, but flagging it early signals that you have thought about their side of the table, which is exactly the kind of credibility that wins deals.

Six moves to get the seller note right

1. Raise the rollover guarantee rule before the seller falls in love with the structure. If the deal contemplates the seller keeping equity, tell them on the first real call that SOP 50 10 8 will require them to personally guarantee the loan for at least two years. Surprises here kill deals; early candor saves them.
2. Default to a seller note instead of rollover equity when continuity is the goal. A standby seller note keeps the seller economically invested in the transition without dragging them into a two-year personal guarantee on your loan.
3. Size the note to do double duty. Aim for roughly 10% of price and put at least 5% of total project cost on full standby so it counts toward your equity injection. That is the difference between writing a 10% check and a 5% one.
4. Insist on full standby if you want the equity-injection credit. No principal, no interest, for the life of the SBA loan. Partial standby does not get you there.
5. Structure amortization at seven to eight years with any balloon at year four or later. It satisfies underwriting, keeps the standby clean, and gives you room to refinance the balloon down the road.
6. Get the deal in front of multiple lenders. Seller-note requirements vary bank to bank. Competing term sheets are how you find the lender whose box fits your deal, and how you avoid restructuring everything to satisfy a single bank.

The seller note stopped being optional somewhere in the last eighteen months.

Treat it as a core part of your structure from the very first conversation, understand how it now collides with the rollover rules, and you will spend a lot less time wondering why a deal that penciled perfectly fell apart at the seller's kitchen table.

Thanks for reading!

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Until next time,

Matthias Smith

President, Pioneer Capital Advisory

​www.pioneercapitaladvisory.com​
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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.