Seller financing and the standby note

It's the most common piece of an acquisition that owners have never heard of. Most owners have borrowed from a bank for a truck or a building. Fewer know that the person selling them a business can carry part of the price too.

You and the seller sign a note. It sets how much of the price the seller is carrying, the interest rate and the payment schedule. You pay the rest of the price at close, usually from a bank loan and your own money. Then you pay the seller over the years the note runs.

Something changes for the seller when they do this. They stay invested in how you run the business for as long as the note runs. If the business struggles, their payments are at risk too. That gives them a reason to pick up the phone after close and help you through the handover.

A standby note takes no payments for a set period. The seller waits, and the bank gets paid first.

That's why lenders like it. In the early years, when a new owner is still learning the business, nothing is going out to the seller. In those years the note behaves more like equity than like a loan.

An SBA lender needs to see an equity injection from the buyer. That's the money you put into the deal yourself. Under SBA rules, a seller note on standby can count toward that injection.

That can change how much cash you need at close. But the details matter. How long the note has to stay on standby is set by the SBA's standard operating procedure and by your lender, and your lender decides the loan. Ask them before you build a deal around it. If you're looking at buying a competitor, our page on the October 1 SBA rule change covers the other tests a lender will run.

Usually, a higher price. A seller who carries paper can often ask more than one who wants every dollar at close. They also earn interest on the note, and they get a buyer who can actually get the deal done.

If you're the one selling, decide how you feel about carrying a note before a buyer asks. In a trades deal, somebody usually will.

You're borrowing from someone who knows the books better than anyone who'll ever look at them. The seller knows exactly what the business earns.

So if they won't carry a note on it, ask why. They may just want to be done. They may also know something about next year that isn't in the file. Either way, that answer is part of your diligence.

We draft the structure before the price. The bank loan, the seller note, the standby period and your own equity go on one page before the first offer goes out. We aren't a lender, and the lender decides any financing.