What's a standard way to structure a business deal with SBA/seller finance?

August 23, 2023

by a searcher in Rancho Cucamonga, CA, USA

I'm going to be making an offer on a business selling for $1.3 million. I plan on offering $1.2M. From what I've been told, the seller is open to carrying a note, and the SBA lender I'm working with has told me that getting this deal funded would be a "slam dunk" based on the financials. What would be the ideal structure for a deal like this? What is a standard ratio between SBA financing and seller finance? I have approximately $100k to put down on the deal. Thank you.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

If you already have a lender on board with providing the financing, I would suggest asking them what their preferred structure is for the seller note. In general, I am finding most lenders still wanting a minimum of 10% equity in on transactions from the buyer / borrower. If a lender is going to do a deal with less equity the SBA now allows that. The new SBA rules state that so long as a seller note is on full standby (meaning no payments will be required) for at least 24 months, then that seller note can be used as equity. Although the SBA allows a note as short as 24 months to be used as equity, some lenders are still requiring the note to be on standby even longer. If the seller note requires interest only payments for the first 24 months only, then the SBA states it can still count for equity but the Borrower is required to bring at least 2.5% in cash equity into the transaction. Again, not all lenders are using this rule and I see most requiring more cash equity than 2.5% except in rare circumstances.

As an example, at a $1.3 million purchase price in theory most lenders are going to like to see $130,000 in equity. However, if you get the seller to take back a note for 5% or $65,000 that is on standby for at least 24 months, I think most lenders would likely consider the deal if it is strong and cash flows sufficient with you bringing another 5% or $65,000 in equity to the table. With you only bringing 5% in will keep you with some cash post closing in case something comes up. Most lenders do not want to completely deplete the buyer / borrower of cash reserves with the transaction. A lender might come back and ask for the seller note to be a bit higher if needed to make the cash flow work or if the lender prefers to see a lower loan to cost on the transaction. As far as how to term out the note after the first 2 years there are plenty of options. You could term it out over the next 10, have it balloon after a couple of years, do a modified amortization, etc. So long as you, the seller and the lender agree with the terms and they work from a cash flow perspective, you can get a deal done.

Hopefully this makes sense. If you need help analyzing your specific request or want to talk through options in more detail, I would be more than happy to do so at any time. You can ping me here or directly at redacted Good luck.

Reply by a lender
from Belmont University in Nashville, TN, USA

I am a loan officer at Live Oak Bank on a team that is focused on providing SBA financing across all industries nationwide. Live Oak is the #1 SBA 7(a) lender by dollar volume amount for FY 2022.* We also offer combination financing for capital needs above $5 MM for business acquisitions of companies with an enterprise value of $7–10 million and potentially higher. In my role as vice president of small business lending, I am focused on building the Live Oak brand, as they provide capital to entrepreneurs nationwide with loans backed by the U.S. Small Business Administration (SBA) and Department of Agriculture (USDA). Here a a guide to seller notes that we have put together. As Brad stated you can use seller financing to fund part of the equity injection if you are looking to put in less than 10% of the total project costs. https://resources.liveoakbank.com/blog/the-importance-of-seller-notes-when-buying-a-business Let’s find time to connect — Lane Rhodes Vice President M###-###-#### E. redacted

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