Questions about funding a business purchase

In seller financing, the seller accepts part of the price as a loan to the buyer, written as a promissory note. The buyer pays the rest at closing, usually with a bank loan and the buyer's own cash, then repays the seller over time, with interest, out of the business's cash. The note sets the rate, the length, the payment schedule, any lien on the business assets, and what happens after a missed payment. The capital stack guide shows where the note sits between the bank and the buyer.

A seller note can cover up to half of the buyer's required equity, and only on full standby. A buyer new to the business contributes at least 10 percent of the total project cost, and the note counts toward that only if the seller takes no payments for the entire term of the SBA loan (the standby guide quotes the SBA's rule). The rest comes from eligible sources such as cash that is not borrowed.

Full standby means the seller receives no payments of principal or interest for the entire term of the SBA loan. When no real estate is in the loan, the SBA caps a purchase loan's amortization at 10 years, so the wait can run a decade. The seller signs a standby agreement, SBA Form 155 or the lender's own equivalent, agreeing to take no action to collect until the SBA loan is satisfied and to turn over any payment received in breach. Interest can keep accruing and be paid after the SBA loan is gone.

The SBA's floor for a buyer who was not already an owner is 10 percent of the total project cost. Total project cost covers everything it takes to complete the purchase, including closing costs and working capital. Up to half of that floor can come from a seller note on full standby, and a lender may ask for more than the minimum.

The buyer and seller set the rate in the note. Tax law sets a floor. When a note states too little interest, the tax rules treat part of each payment as interest anyway, measured against the applicable federal rates the Internal Revenue Service publishes each month. Carrying a note when you sell your business links the rate tables and the IRS publication that sets the test.

Carrying a note leaves part of the price with a business the seller no longer runs, and a note ranked behind the buyer's bank is repaid only after the bank. A perfected lien on the business assets and a personal guaranty from the buyer give the seller something to collect from. A reporting term puts the buyer's financial statements in front of the seller while the note is outstanding. A long standby period, a balloon payment or an unsecured note leaves the seller waiting with less behind the promise. Carrying a note when you sell your business goes term by term, including a court decision on a lien that was filed and still failed.

A sale with at least one payment after the year of sale is an installment sale, and the gain can generally be reported as the payments arrive. Three details work differently. Depreciation recapture is taxed in the year of sale even if no payment arrives that year. Interest received is ordinary income. Inventory does not qualify for the installment method. The seller's guide links each of these rules to IRS Publication 537.

A capital stack is the ranked list of everyone whose money pays for the purchase. In an SBA deal the lender is repaid first and a seller note waits behind it. The buyer's own cash collects only what is left once every lender is paid. The capital stack guide reads each layer for its monthly cost and for what happens to it in a bad year.

For loans numbered on or after October 1, 2026, the SBA's minimum is 1.25 for an initial acquisition and 1.15 for a business expansion, and under the earlier procedure the general minimum is 1.15. Coverage is the business's earnings before interest, taxes, depreciation and amortization divided by all its debt payments after the purchase, including a seller note that is being paid, and under the newer procedure the lender measures it on the last fiscal year or the average of the last two.

The SBA's procedure prohibits seller earnouts in a change of ownership, in procedure 50 10 8 and again in procedure 50 10 8.1, which applies to loans numbered from October 1, 2026. A buyer rebate tied to the business's performance is allowed, because it benefits the borrower. Under the newer version, any rebate money goes to paying down the principal of the SBA loan.

In the notice quoted in the standby guide, the SBA told lenders to keep using standard operating procedure 50 10 8 for applications submitted through September 30, 2026, and to apply procedure 50 10 8.1 to applications that receive an SBA loan number on or after October 1, 2026. The notice leaves one case open: an application submitted under the earlier version that receives its loan number after the change. The new version gathers the purchase rules into one appendix and makes a seller note wait three years instead of two before SBA money can refinance it.

The site explains how funding instruments work, as general information, and gives no personalized financial, tax or legal advice. Nothing on it is an offer to lend money or to buy a business. The about page names the company that publishes the site and describes how each page is drafted and checked against its sources.