Seller Notes, Earnouts, and SBA: The Building Blocks of a Main Street Deal

Buying a business on Main Street isn’t just about finding the right company — it’s about structuring a deal that works for you, the seller, and the bank. And unless you’re sitting on a pile of cash, you’ll need to get creative. That’s where seller notes, earnouts, and SBA financing come in — the three building blocks that form the foundation of most Main Street acquisitions.

This article will walk you through each one, break down how they work, and show you how to strategically combine them to buy a profitable business with less cash down, lower risk, and a higher chance of success.

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🧱 Part 1: Seller Notes – The Ultimate Alignment Tool

A seller note is when the seller agrees to finance part of the purchase price. Instead of receiving the full amount at closing, they receive payments over time, typically 3 to 7 years, with interest.

Why seller notes matter:

• They reduce your equity requirement.
• They signal seller confidence in the business.
• They help close valuation gaps when you can’t offer full price up front.

Common Terms:

• Size: Typically 10%–30% of the purchase price
• Term: 3–7 years
• Interest: 6%–10%
• Security: Often subordinated to senior debt (e.g., SBA loan)
• Standby Status: If used in conjunction with SBA, seller notes must often be on “full standby” for 2 years

But here’s where seller notes get interesting — they’re flexible. Especially in SBA-backed deals, where earnouts are technically not allowed, seller notes can be written with performance contingencies that mimic the behavior of an earnout — without violating SBA rules.

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🎯 Part 2: Earnouts – Bridging the Valuation Gap (and Why They Don't Work in SBA Deals)

An earnout is a tool for bridging valuation gaps. Let’s say the seller believes their business is worth $2M because they just landed a major new client. You, the buyer, believe it’s worth $1.5M because that revenue hasn’t stabilized. An earnout says: “Fine. I’ll pay you $1.5M now, and up to $500K more if things go the way you say they will.”

Typical Earnout Mechanics:

• Tied to future metrics: revenue, EBITDA, customer retention, etc.
• Time-based: 12 to 36 months post-close
• Contingent: seller only gets paid if performance thresholds are met

The SBA Caveat: Earnouts Are Prohibited

If you're using an SBA loan to finance your deal, here’s the hard truth: earnouts are not allowed. The SBA requires the purchase price to be fixed and determinable at closing. Why? Because the SBA is guaranteeing the loan, and they don’t want repayment contingent on future performance.

BUT — there’s a workaround.

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⚖️ Seller Notes as Earnout Proxies in SBA Deals

Here’s the nuance: if the seller note is not being used toward the buyer’s equity injection and is on full standby for 24 months, then the SBA allows for performance-based seller notes. In other words, you can tie the amount, interest rate, or repayment terms of the seller note to the post-close performance of the business — essentially functioning like an earnout, without triggering SBA violations.

Example:

• Deal Size: $1.8M
• SBA Loan: $1.35M (75%)
• Buyer Equity: $270K (15%)
• Seller Note: $180K (10%) — on full standby, not used as equity injection

You could structure the seller note like this:

• Base repayment: $100K over 5 years
• Bonus clause: an additional $80K paid out only if EBITDA exceeds $600K in years 1 and 2

Key Takeaway: When structured properly, seller notes in SBA deals can act like performance-based compensation, allowing sellers to earn more if the business performs — without violating loan rules.

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💰 Part 3: SBA Loans – The Engine That Makes It All Go

For most Main Street acquisitions (sub-$5M), the SBA 7(a) loan is the financing vehicle of choice. Why? Because it offers:

• Up to 90% financing
• 10-year terms
• Reasonable interest rates (11–12.5% as of mid-2025)
• No balloon payments

In most SBA structures, your capital stack looks like this:

Source	%	Notes
SBA Loan	70–80%	Max $5M
Buyer Equity	10–15%	Must be cash or assets
Seller Note	10–20%	Can’t be used toward equity if performance-based

Why It Works:

• Lower equity requirement = more deals you can do
• Long amortization = lower monthly payments
• Allows first-time buyers with strong personal credit and management experience to acquire real businesses

SBA Deal Structuring Rules (You Can’t Ignore):

• No earnouts: Purchase price must be fixed at closing
• Seller note must be on full standby to count as part of the capital injection
• Personal guarantee required
• Collateral required if available, but not a deal-killer if insufficient

If you’re acquiring in Colorado, be aware that lenders may have local overlays — additional requirements based on geography or industry. For example, some lenders may be more aggressive funding service businesses in Denver, but conservative with hospitality or restaurants in rural counties. Choosing the right lender with SBA expertise is as critical as choosing the right business.

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🧠 Deal Stacking in Action: Real-World Example

Let’s say you’re acquiring a $2M HVAC business in Northern Colorado with $600K in EBITDA.

Here’s how a smart capital stack might look:

• SBA Loan: $1.5M
• Buyer Equity: $250K
• Seller Note (Performance-Based): $250K

You might structure the seller note to include:

• Base repayment of $125K over 5 years, on standby for 24 months
• Additional $125K bonus if gross margin remains above 60% for two years

This lets the seller “earn” the full $2M they’re asking for — but only if the business performs — and keeps you from overpaying up front.

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🧭 Final Thoughts: Build the Stack, Close the Deal

Every successful Main Street acquisition comes down to how you structure the deal — not just the price you pay.

• Seller notes create alignment, build trust, and reduce capital requirements.
• Earnouts (or their performance-based seller note cousins) let you de-risk uncertain projections.
• SBA financing gives you leverage, long terms, and low equity thresholds — but comes with strings attached.

If you want to win in this game, you have to master the art of the stack. Great deals don’t fall apart because of price — they fall apart because of poor structure, misaligned incentives, or financing that doesn’t fit.

Get this right, and you’ll not only buy your first business — you’ll build a repeatable system to acquire multiple.

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P.S. Want to shortcut the learning curve? At Clearly Acquired, we help acquisition-minded operators structure deals, secure financing, and close with confidence. Whether you're buying your first business or your third, we've built the tools, team, and technology to help you win.

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