Seeking Deal Structure Advice – Relationship-Heavy Service Business

I’m evaluating a small service business with 3–4 FTEs including the owner, who’s been in the space for over 30 years. The company serves a handful of referral partners who act as the entire salesforce. These partners receive a large commission(40-50% gross) and handle client acquisition and retention — the business itself has no direct relationships with end clients. The partners run a complementary business and their clients need these services. This is a common structure in the industry. The business has been stable for years, but it relies entirely on the seller’s personal relationships. These partnerships are sticky due to switching costs, but there are no contracts in place, even though long term contracts with exclusivity are typical in this industry. ⸻ My Background I’ve owned and operated a similar business, and previously worked in this exact industry as a technician. I have a deep bench of techs and a few qualified middle managers ready to step. I however do not have experience working through these partners. I was direct to clients. ⸻ Key Risks • 100% of revenue depends on ~6 referral sources • No contracts — agreements are handshake-based • Seller is a key man, physically working in the business daily, as a tech • Small team — SDE likely inflated by one missing FTE • CapEx needs are nontrivial, not reflected in SDE • Diligence limited — I can’t speak with referral partners pre-close Given the lack of contract enforceability and the fact that most of the value is in the seller’s relationships, I’m unwilling to PG this deal. I also don’t believe the business is SBA financeable(correct me if I am wrong) so I’m treating this as a risk-contained opportunity where I’m willing to risk 10% cash and my time, but not personally secure the entire debt. Structure I’m Exploring • 10% cash at closing • Seller note for the equipment/assets, maybe up to 40-50% purchase price (secured, no PG) • Remaining enterprise value paid via a structured earn-out, tied to performance thresholds over 3–5 years • Earn-out could be tiered or pro rata based on SDE or gross margin benchmarks • Total valuation target is ~2.5–3x 3-year trailing SDE (asking is closer to 4x) SDE is in the neighborhood of 500k. From my seller interview, I believe we have a good shot at making an arrangement like this work, as I am assuming most other offers are also seller finance and earn out heavy, so finding the right buyer who can reliably operate and grow is essential to the seller. It’s going to be hard to find one with better business buyer fit then us. Questions for the Community • Would you lead with a full earn-out offer, or include a modest seller note to sweeten the deal? • Is it worth considering a 5–15% retained equity option for the seller with a future buyout, to help bridge the relationship handoff? • Any examples of deals that worked like this — small team, no contracts, referral-dependent? ⸻ I appreciate any thoughts or hard-earned wisdom. If I didn’t have relationships in this industry I wouldn’t touch this deal, but with my background, it might just be workable. Thanks in advance