Margin note
The note is evidence, not insurance.
Two businesses each carry a $400,000 asking price and report $150,000 of seller’s discretionary earnings, a valuation near 2.7 times SDE.
Seller A wants every dollar at closing.
Seller B accepts $300,000 at closing and carries a $100,000 note for six years, subordinated to the senior lender.
The valuations match on paper, but the two sellers are not promising the same thing.
Seller B leaves 25% of the purchase price exposed to the owner’s departure, customer handoffs, operating mistakes and senior debt service. They can still be wrong about all of it, but they are paying to express the opinion.
Add-backs and “durable customer relationships” cost nothing to defend across a conference table. A subordinated note puts the claim in the payment queue. At closing, one seller takes the wire and leaves. The other waits on the cash flow they just sold.
Why the signal exists down here
In 2025, BizBuySell's tracked broker transactions showed a median sale price of approximately $350,000, with median SDE of about $158,950 — a broker-reported sample rather than a census. The average cash-flow multiple was 2.61 times, and the median transaction took roughly 170 days to close.
Those numbers describe a structurally awkward market. A business producing $150,000 of SDE is usually too small to absorb institutional diligence, legal and monitoring costs. Fixed transaction expenses do not become charming merely because the target is inexpensive, and a fund would spend roughly the same six-figure process cost here as it would on a deal a hundred times the size.
The same business is often too operational for passive capital. SDE adds back the owner’s salary, benefits and discretionary expenses because the buyer is expected to replace the owner. If the plan is to hire a manager instead, some of the advertised cash flow immediately acquires a payroll number.
That leaves a narrow buyer pool: individual operators willing to accept illiquidity, run the company and use acquisition debt. The seller knows which customers belong to the business and which belong to them personally. The buyer sees tax returns, contracts and explanations assembled after the fact.
Seller financing pushes some of that information asymmetry back onto the person who holds the information. The question worth asking is how much of their own valuation the seller will finance, for how long and behind whom.
Standby has a specific meaning
The SBA 7(a) program supplies much of the financing plumbing at this end of the market. The maximum loan is $5 million, with SBA guaranty exposure capped at $3.75 million. For loans above $150,000, the guaranty is up to 75%, and a standard business-acquisition term can extend to ten years.
Under SOP 50 10 8, effective June 1, 2025, a complete change of ownership requires an equity injection of at least 10% of total project cost. A seller note can satisfy no more than half of that requirement, capped at 5% of total project cost, and the qualifying note must remain on full standby for the life of the SBA loan. No principal or interest gets paid during that period.
On a $400,000 project, the minimum injection is $40,000. At most $20,000 can come from a qualifying standby seller note; the other $20,000 must be buyer cash. A larger note can sit outside the required injection as additional subordinated financing, subject to the deal’s debt-service capacity.
“Seller financing available” is a listing checkbox; the useful information sits in the note’s terms.
Read the whole confidence dial
Start with the amount. A token note equal to 5% of the price creates less exposure than one covering 25%. Neither proves confidence, but they are not equivalent commitments.
Then read maturity. A seller exposed for six months is mainly underwriting the handoff. A seller exposed for six years remains dependent on customer renewals and the business’s ability to function after they leave. Industry sources put the typical note somewhere in the five-to-seven-year range at roughly 8% to 10%, though the underlying data is broker-reported rather than measured.
Amortization shows how quickly that exposure disappears. Immediate principal payments can return much of the seller’s money before the buyer sees a normal operating year. Interest-only periods and balloons distribute the risk differently, even when the face amount is identical.
Standby determines when payment is prohibited. Full-life standby behind a ten-year SBA loan leaves the seller’s capital exposed far longer than a brief payment holiday. Subordination controls the queue: the senior lender gets paid first, and the seller collects afterward.
Take a $100,000 note amortized over six years at 8%. Annual debt service is roughly $21,000. The interest rate is the loud number, so it attracts the discussion. The payment waterfall matters more. That $21,000 comes after senior debt and must be measured against cash flow after replacement labour, maintenance spending and working-capital needs — not against the full $150,000 of advertised SDE.
The customer pays the business, the business pays the bank, and the seller waits.
Resistance is a diligence map
Resistance to a proposed note is not an accusation. It is a way to locate the assumption that needs more work.
If the seller resists a maturity extending beyond a major contract renewal, check renewal history, termination rights and who owns the relationship: the company or the departing owner. If they want repayment completed before transition support ends, test whether revenue survives without their involvement. If they will finance tangible assets but not goodwill, isolate how much of the price depends on transferable earnings.
If they reject financing tied to claimed add-backs, strip those add-backs out and rerun the coverage.
A large balloon deserves the same scrutiny. It lowers current payments by pushing risk toward a date when refinancing may become necessary, which can be sensible structuring but does not make the risk disappear. It moves the appointment.
SDE also needs correction before it can be used for debt capacity. If the departing owner performs work the buyer cannot or will not perform, deduct market-rate replacement compensation. If one customer supplies 35% of revenue, the proposed note should stay outstanding through that customer’s next renewal. Advisory rules of thumb put the multiple haircut for concentration at that level somewhere around half a turn to two turns, but those are practitioner heuristics rather than measured coefficients. The concentration itself is not a heuristic.
What changes in year three that makes year two acceptable and year four impossible?
Confidence can be sincere and wrong
An owner can refuse seller financing for a straightforward reason: they want a clean exit. They may also distrust the buyer, which is not irrational. A buyer’s willingness to purchase a business does not establish that the buyer is more competent than the person leaving it.
The reverse is equally dangerous. A large seller note can reflect confidence, or it can reflect a thin buyer pool and an owner who overestimates how well their relationships will transfer. Two people can agree enthusiastically on the cash flow and still be wrong together. The note merely determines whose capital absorbs the error first.
It cannot replace tax returns, bank statements, contracts, payroll records, customer histories or working-capital analysis. A seller’s willingness to support their own number is not a reason to accept debt the business cannot carry. The note is evidence, not insurance.
It is also worth admitting what this framework cannot see. The confidence dial reads the terms a seller will accept, and a seller accepts terms for reasons that have nothing to do with the numbers — a health event, a divorce, an heir who finally said no, a broker who told them what the market expects. The signal is real and it is also contaminated, and no amount of arithmetic separates the two.
Leave uncertainty with the informed party
The all-cash seller is not automatically rejected and the one carrying $100,000 is not automatically approved. The proposed terms are used to find the specific claim they will not finance, verify it independently and reprice or restructure around what that verification turns up.
Debt capacity gets sized against distributable cash flow after the owner has been replaced and the business maintained. Advertised SDE is the opening submission. The seller brings years of operating memory; the buyer brings months of diligence; the senior lender takes the first claim.
Before all the proceeds leave on closing day, the question is why none of the purchase price can remain exposed through the first difficult renewal. Once the transition calls stop and the bank begins collecting, the balance still owed to the seller tells you how much of their certainty survived contact with the terms.
