From headline to bank account
Tax has not been taken yet. That comes off the $3,470,000, not off the $6,000,000, and on an asset sale it is substantial.
Where you sit in the queue
If the business struggles, the order of payment is decided before you sign, by an intercreditor agreement you may never read.
The buyer’s equity is wiped out before your note is touched. They lose $1,530,000 before you lose a dollar, which is precisely why the equity percentage matters to you as much as it does to the lender.
A buyer putting in 5% has little to lose by walking away. Ask what they are contributing, and treat a thin answer as information about the risk you are being asked to carry.
What standby actually costs you
You will be asked to put the note on standby — to defer payment so the business covers its senior debt more comfortably. It is a real concession with a computable price.
Move through the three options and watch the coverage figure. Full standby takes the deal from 1.29× to 1.99× at no cash cost to the buyer, which is exactly why it gets asked for. The cost is entirely yours, and on full standby it is $1,782,108 of payments you would otherwise have received.
Under SOP 50 10 8, a seller note counts toward the buyer’s 10% equity injection only on full standby for the life of the SBA loan — typically ten years, with no principal and no interest — and never more than half the injection.
Ten years of nothing. A seller in their sixties is being asked to wait until their seventies for money they have already earned. A note on partial standby can still be subordinate debt that bridges a gap — it simply does not count toward the injection. Those are two different jobs and conflating them is expensive.
Price it like the loan it is
You are an unsecured subordinated lender to a business you no longer control, run by someone whose track record with it is zero. That is a higher risk than the senior lender is taking, and it should carry a higher rate.
Seller notes are routinely written at 6–8% while the senior lender charges 9.5% on a fully secured first position. The pricing is backwards, and it happens because the note is negotiated as part of the price rather than as a credit decision.
| Ask for | Why it matters |
|---|---|
| A rate above the senior | You are behind them and unsecured. If the deal cannot carry it, that is information about the deal. |
| Second lien on the assets | Behind the senior, ahead of nothing is still better than nothing. Note that the SBA collateral threshold fell to $50,000, so lenders now take a lien on almost everything — which shrinks what is left for you. |
| A personal guarantee | From the buyer individually, not just the acquiring entity. An entity with no assets guarantees nothing. |
| Financial reporting | Monthly or quarterly statements while the note is outstanding. You cannot act on a problem you cannot see. |
| Acceleration on sale | If the buyer sells the business on, your note is repaid. Otherwise you are financing a stranger you never assessed. |
| A stated cure period | What happens on a missed payment, in writing, agreed while everyone is friendly. |
The intercreditor or subordination agreement with the senior lender governs what you can do if the buyer stops paying you. Many prohibit you from taking any action at all while the senior debt is outstanding — no demand, no acceleration, no suit.
You can hold a defaulted note for years and be contractually barred from doing anything about it. Read that agreement before the note, not after, because the note is worth exactly what the intercreditor lets it be worth.
Why it is often still the right answer
None of this is an argument against seller paper. It frequently makes a deal possible that no lender would fund alone, and the interest can make the total consideration higher than an all-cash offer at a lower price.
There is also a tax point worth raising with your adviser: installment treatment can spread the gain across the years you are paid, keeping more of it in lower brackets rather than realising it all in one year. That is a genuine benefit of carrying paper, not a consolation.
Would you lend $1,500,000 of your own money, unsecured, to this buyer, to run this business, at this rate? If the answer is yes, the note is fine. If it is no, you have not been offered $6,000,000 — you have been offered $3,470,000 and an investment you would not otherwise make.