Almost every seller I meet has a number in their head. Very few have thought about how they are going to get paid, and that second question decides more about the outcome than the first one does. Two offers at the same headline price can be worth several hundred thousand dollars apart once the structure is written down.
This is what the moving parts actually are, and which of them are worth arguing about.
The price is not the deal
A purchase price is a single number that gets split into components: cash at closing, bank debt, a seller note, sometimes an earnout, sometimes retained equity, and almost always a holdback sitting in escrow for a while after everyone shakes hands.
Each component carries different risk. Cash at closing is certain. A seller note is a bet on the buyer running the business well enough to pay you. An earnout is a bet on performance you no longer control. Adding them together and calling the total your price is how sellers end up disappointed eighteen months later.
The useful question is not what number is on the letter of intent. It is how much of that number is money you are certain to receive, and when.
Cash at closing, and where it comes from
In the lower middle market most cash at closing is borrowed, and for deals under $5M that usually means an SBA 7(a) loan. That matters to a seller because the lender's rules become the deal's rules, whether or not anyone invited them.
Under the SBA's current standard operating procedure, SOP 50 10 8, effective 1 June 2025, a full change of ownership requires a minimum equity injection of 10% of total project cost. That is the buyer's own money, and total project cost covers everything needed to complete the transaction, not only the purchase price.
The part sellers should understand is what the SBA will accept as part of that injection. A seller note can count toward it, but only if two conditions hold: it is on full standby, meaning no principal and no interest for the entire term of the SBA loan, and it makes up no more than 50% of the required injection.
Work that through on a 10% requirement and a seller note can cover at most 5% of the project cost, and you will not see a dollar of it until the bank is repaid, typically ten years later. A seller who agreed to "hold a little paper" without reading that sentence has agreed to something quite different from what they thought.
The seller note
Seller financing is normal and it is not a concession. It is how a buyer bridges the gap between what the bank will lend and what you want, and a seller who refuses to hold any paper narrows the buyer pool to people who do not need to ask.
What to negotiate, in the order it matters:
- Standby or not. A note on full standby is a different asset from one that pays monthly from day one. If it is counting toward the SBA injection it must be on standby, so decide whether you would rather have a smaller purchase price with a serviceable note.
- Term and rate. A note behind an SBA loan is subordinate. You are paid after the bank, always.
- What secures it. A personal guarantee from the buyer, and what happens if the business fails while you are still owed money.
- Right of offset. Buyers will want the ability to reduce the note if an indemnity claim lands. Where that is drafted decides whether a disagreement about a warranty becomes a negotiation or a lawsuit.
Earnouts, and why they go wrong
An earnout ties part of the price to the business hitting agreed numbers after closing. It is proposed when buyer and seller disagree about the future, and it is genuinely useful when the disagreement is honest.
It also produces most of the post-closing disputes I see, for a structural reason: you are being paid on the performance of a business somebody else is now running. They control pricing, hiring, what gets counted as an expense and whether this year absorbs a cost that could have waited.
If you agree to one, tie it to the least manipulable number available. Revenue and gross profit are hard to argue about. Net profit and EBITDA are matters of accounting policy, and accounting policy will belong to the buyer. Put in writing how it is calculated, who prepares the statements, what access you have to the books, and what happens if the buyer sells again before the period ends.
Escrow and holdbacks
Part of the price is normally held back after closing to cover the representations and warranties you made. If something you promised turns out to be wrong, the buyer claims against that money instead of coming after you personally.
The negotiation is over three things: how much, how long, and whether it is the buyer's only remedy. That last one is the important one. A holdback that is the sole and exclusive remedy caps your downside at the amount held. Without that language, the holdback is a convenience for the buyer and your exposure is whatever the agreement says it is.
Asset sale against stock sale
Nearly every lower-middle-market deal is an asset sale, and buyers have good reasons: they choose what they take, and they leave the liabilities they do not know about behind.
Sellers usually prefer a stock sale, largely for tax treatment. You will not often win that argument, and it is not usually the argument worth spending your leverage on. What is worth spending it on is the allocation of the purchase price across asset classes in an asset sale, because that allocation decides how much of your proceeds are taxed as capital gain and how much as ordinary income. It is negotiated, it is written into the agreement, and both sides file it. Sellers routinely concede it without realising it was on the table.
Take that one to your CPA while the letter of intent is still in draft.
Working capital
The agreement will set a working capital target, and the business is expected to arrive with roughly that much in it. Deliver less and the price is reduced at closing; deliver more and, if you negotiated it, you are paid the difference.
This is the least glamorous part of a deal and one of the most expensive to get wrong, because the target is usually set from a trailing average that you can influence in the months beforehand. An owner who collects aggressively and stretches payables ahead of closing can hand over a business that misses its own target and lose real money on the adjustment.
What you agree to do after closing
Structure is not only about money. A purchase agreement also buys your time and your restraint, and both are worth pricing.
Transition support. Most deals include a handover period, commonly thirty to ninety days, sometimes full time at the start. Agree the hours and the duration in the letter of intent. "Reasonable assistance" left undefined means whatever the buyer decides it means, and you will be the one commuting.
A consulting agreement. If the buyer wants you for longer, that is a separate paid arrangement and should be priced as one. It is also taxed as ordinary income, so shifting purchase price into consulting fees is worse for you than it looks and better for the buyer, who deducts it. Watch for that trade being offered as generosity.
A non-compete. Expect one, and expect it to be enforceable, because you are being paid for it as part of the sale. What matters is scope: how long, what geography, and what counts as a competing business. An owner with plans to do something adjacent afterwards should raise it while the terms are still open.
The point of all three is that they are negotiable while the price is being agreed and effectively fixed afterwards.
Rollover equity
When the buyer is a private equity group instead of an individual, you may be asked to keep a stake, commonly ten to thirty percent, and sell it later when they exit. This is the second bite of the apple, and it is genuinely how some sellers make more from the second sale than the first.
It is also the component sellers understand least well. Three things decide whether it is worth having:
- What you are rolling into. Usually not the company you just sold, but a holding company above it that may carry acquisition debt. Your stake is behind that debt.
- Whether your shares are the same as theirs. If the sponsor holds preferred stock with a liquidation preference and you hold common, they are paid first at the next exit and a mediocre outcome can return you very little.
- What happens if you want out. Minority stakes in private companies are close to unsaleable without a contractual right. Look for tag-along rights, and understand any drag-along that lets them force your hand.
Rollover is not a reason to avoid an institutional buyer. It is a reason to have the equity documents read by someone who has read them before.
When the money actually arrives
Put the components on a timeline and the difference between two equal-priced offers becomes obvious.
- At closing: the bank's money and the buyer's injection, less the escrow holdback and any working capital shortfall.
- Twelve to twenty-four months: the escrow releases, assuming no claims against your representations and warranties.
- Over the earnout period: whatever the business earns against targets you no longer control.
- On the schedule of the seller note: monthly if it services, or nothing at all until the SBA loan is retired if it is on full standby.
- At the sponsor's exit, if ever: the rollover.
An offer that is ninety percent cash at closing and an offer with the same headline number spread across a standby note, an earnout and rolled equity are not comparable, and no spreadsheet that adds them up will tell you that. Discount each component by how likely it is to arrive and how long you wait, then compare.
What this means before you sign anything
Structure gets decided at the letter of intent, well before the purchase agreement. By the time lawyers are drafting, the price, the note, the earnout and the broad shape of the escrow are already agreed in principle, and reopening them makes you look like you are retrading.
Which is why the letter of intent is the wrong document to sign quickly. Every item above should have a position in it, even a rough one.
If you are thinking about selling in the next year or two and want to understand what your structure would realistically look like, that is a conversation worth having before you are holding an offer.