Almost every owner starts out wanting all cash at closing. Almost no transaction in the $1M to $15M range closes that way, and the reason is arithmetic: the buyer needs a lender, and the lender wants the seller to have a reason to care what happens after the closing.
Structure is where most of the money in a deal is actually decided. Two offers at the same headline price can differ by hundreds of thousands of dollars in what you receive and when.
What Changed on June 1, 2025
The SBA’s SOP 50 10 8 took effect that day and it reshaped what buyers can offer. The provisions that matter to a seller:
• A complete change of ownership requires a minimum 10% equity injection, calculated on total project costs, which the SBA defines as all costs required to complete the change of ownership regardless of the source of funds.
• A seller note can count toward that injection only if it is on full standby for the life of the SBA loan, meaning no principal and no interest payments for the entire term, and only up to half of the required injection. On a 10% requirement, that is a maximum of 5% of project costs.
• The note has to be documented properly, using SBA Form 155 or the equivalent.
• A second subordinated note on limited standby sits outside the equity calculation and can be structured so that it stays out of the coverage analysis during underwriting.
Read that carefully, because it is the difference between two offers. A buyer who structures your note as equity injection is asking you to receive nothing on that portion for ten years. A buyer who structures a second note on limited standby is asking you to wait a couple of years and then get paid. Those are very different propositions at the same price.
Why a Seller Note Is Usually Good for You
Owners resist this and the resistance is often expensive.
• It raises the price. A buyer who does not have to fund the entire purchase in cash can pay more for the business, and typically does.
• It widens the buyer pool. More qualified buyers can transact, and more buyers means competition, which is the only thing that actually sets a price.
• It makes the SBA file work. Lenders read a seller carrying paper as a seller who believes the business will perform. A refusal to carry any is read the other way, fairly or not.
• It earns interest. A note at market rate on a portion of the price is a return on money you would otherwise have to invest somewhere.
The risk is genuine and it is the obvious one: if the business fails, you may not collect. That is managed through structure. It is not avoided.
How to Structure the Note
• Size it. Ten to thirty percent of the purchase price is the ordinary range. Above that, you are financing your own exit and taking most of the risk of a business you no longer control.
• Set a real interest rate. A note at market rate. A note at zero is a price reduction disguised as financing, and the IRS has views about imputed interest.
• Keep the term short. Three to five years. The longer the note, the more of your consideration depends on someone else’s operating decisions.
• Take security. A lien on the business assets, subordinate to the bank. Personal guarantees from the buyer where you can get them.
• Write real default provisions. Acceleration, and a defined right to step back in. A note with no consequences for non-payment is a hope.
• Know where the SBA standby language leaves you. Full standby for the life of the loan means exactly that, and the loan may run ten years.
Earn-Outs, and When to Refuse One
An earn-out ties part of the price to future performance. Buyers propose them when they doubt the earnings will continue, or when you and they disagree about the value and want to split the difference.
They work in narrow circumstances: where you are staying involved long enough to influence the result, where the metric is revenue or gross profit instead of net income, where the measurement period is twelve to twenty-four months, and where the accounting method is defined in the agreement so it cannot be adjusted against you.
Refuse one where the metric is net profit and you have no control over expenses, where the period runs past three years, where the buyer intends to merge your operation into an existing one so the numbers stop being separable, or where the accounting is undefined. Treat any earn-out as money you may not receive, and if the deal only works when you count it, the deal does not work.
What Cash at Closing Actually Depends On
Sellers think of cash at closing as a negotiated figure. It is mostly an output of the buyer’s financing, and understanding the inputs tells you which offers are real.
• The buyer’s own equity. Under SOP 50 10 8 they must inject at least 10% of total project costs, and only half of that can come from a seller note on full standby. So a buyer with genuine cash is a buyer who can close.
• The coverage ratio. The lender tests whether the business cash flow covers the debt service with margin. That test, and not your asking price, sets the ceiling on what can be borrowed. A business with $600,000 of adjusted earnings supports a defined amount of debt regardless of what anyone wishes.
• Whether real estate is in the deal. A longer amortization on the real estate portion lowers the blended payment and improves coverage, which supports a higher total price.
• The quality of your books. Every dollar of earnings a lender will not accept is several dollars off what can be financed, and therefore off your cash at closing. This is the most direct financial argument for cleaning up the accounting a year early.
• Working capital. The lender wants the buyer to have operating cash after closing. A buyer who has stretched to the limit is a buyer whose deal falls apart in underwriting.
The Tennessee Tax Position on an Installment Sale
This is where Tennessee genuinely differs, and it cuts in a useful direction.
Tennessee has no state personal income tax. The Hall tax on interest and dividends was repealed for tax years beginning January 1, 2021. So for an individual receiving note payments and interest over several years, there is no state tax on those receipts as they come in. In a state with an income tax, a seller carrying a five-year note pays state tax on each year’s recognized gain and on the interest.
The part owners get wrong is assuming that means the state takes nothing. Tennessee taxes at the entity level:
• Excise tax at 6.5% of Tennessee net earnings. The base starts from federal taxable income with state adjustments under Tenn. Code Ann. § 67-4-2006, so gain the entity recognizes on an asset sale is inside it.
• Franchise tax at 0.25% of Tennessee net worth, minimum $100.
Corporations, LLCs, limited partnerships and business trusts are subject to both. General partnerships and sole proprietorships are not, because the statute draws its line at limited liability protection.
How the installment method interacts with the entity-level excise base is a question for your CPA and it should be answered before you agree to a payment schedule. Compare it against a Georgia-side seller in Catoosa, Dade or Walker County, who pays Georgia’s flat individual rate on the gain, 4.99% for 2026, and the case for modeling both is obvious.
One mechanical item: if the note is secured by real property, Tennessee’s recordation tax on indebtedness is $0.115 per $100 of indebtedness less the first $2,000, payable on recordation.
The Rest of the Structure
• Asset sale against stock sale. Most transactions in this range are asset sales. The buyer gets a stepped-up basis and leaves most historical liabilities behind; the seller usually prefers a stock sale for the cleaner capital gain treatment. This gets negotiated, and the outcome is reflected in the price.
• Purchase price allocation. How the total splits across equipment, inventory, goodwill and the non-compete determines what is ordinary income and what is capital gain, and it moves the entity-level excise base. Model it before the letter of intent.
• Escrow and holdback. Commonly five to ten percent held for twelve to eighteen months against breaches of the representations and warranties. Ordinary and reasonable. Negotiate the size, the period and the conditions for release.
• Working capital target. The agreement should specify how much working capital comes with the business and how a shortfall or surplus is settled at closing. Left undefined, this becomes an argument in the last week.
• Transition and consulting. Thirty to ninety days of training is standard. If a longer arrangement is wanted, price it separately and document it, because a consulting agreement and a purchase price are taxed differently.
• Non-compete. Expect one. Scope, duration and geography are all negotiable, and in a metro that spans two states the geographic definition needs actual thought.
The Letter of Intent Is Where This Is Decided
Almost every term discussed above gets set inside the LOI, and sellers routinely treat that document as a formality because it is described as non-binding.
It is non-binding on the obligation to close. It is entirely binding in practice on everything else, because once you have signed it you are negotiating against your own agreed position and every change you ask for reads as a retrade. The buyer knows this. It is why they want detail in it.
Get these into the LOI explicitly, or accept the buyer’s version of them later:
• Purchase price and how it allocates across equipment, inventory, goodwill and the non-compete.
• Cash at closing, stated as a number.
• Seller note principal, rate, term, security and the exact standby terms.
• Escrow amount, holdback period and the conditions for release.
• The working capital target and how a shortfall or surplus settles.
• Length of the diligence period and what an extension requires.
• Your transition obligation in weeks and hours, and whether anything beyond it is paid separately.
• Non-compete scope, duration and geography, which in a two-state metro needs actual definition.
• Any licensing or landlord consent that has to be obtained, and who bears the delay.
An LOI that says "customary terms" on any of these is a term you have conceded without knowing it.
How to Compare Two Offers
Ignore the headline. Build a simple table for each: cash at closing, note principal and its standby terms, interest rate and term, earn-out treated as zero, escrow amount and release date, and the estimated tax at each point. Then compare the present value of what you actually receive.
A $4M offer with $2.6M at closing, a $600K note on full standby for ten years and an $800K earn-out is a weaker deal than a $3.6M offer with $3.2M at closing and a $400K note over three years. Sellers accept the first one regularly, because the number on the front page is larger.
Thinking Through a Structure?
Structure is where the money is, and it gets set inside the letter of intent, which is exactly when most sellers are focused on the price. If you have an offer in front of you or expect one, the conversation is worth having before you sign anything.
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