Seller Notes Done Right. A One-Page Framework.
Interest, term, subordination, forgiveness triggers. The exact language that keeps both sides protected when the SBA underwrites the rest of the stack.
Why The Seller Note Is The Most Misunderstood Instrument In SBA Deals
The seller note is the difference between a deal that closes and a deal that dies at credit committee. Structured right, it counts toward the SBA equity injection, reduces the buyer's cash-in requirement, and gives the seller a real yield with real protection. Structured wrong, the lender kicks the package back and the whole file sits for another month.
The Five Levers
- ◆Interest — blended rate, usually five to nine percent depending on subordination and standby length.
- ◆Term — three to seven years, matched to buyer cash flow after debt service, not to seller preference.
- ◆Standby — full standby on year one at minimum, twenty-four months when the note is counting toward SBA equity injection.
- ◆Subordination — express language subordinating to the SBA lender, no cross-default with the senior facility.
- ◆Forgiveness triggers — tied to retention of a named key customer or key employee, not vague post-close performance.
What The SBA Actually Cares About
If the seller note is counting toward the ten percent equity injection, the SBA SOP requires full standby for at least twenty-four months and the note cannot balloon or reprice inside the loan term. Get this wrong and the lender kicks the package back at credit committee, not at closing. It is the single most common reason a seller note gets rewritten mid-deal.
| Feature | Counts As Equity Injection? | Notes |
|---|---|---|
| Full standby 24 months+ | Yes | Cleanest path |
| Partial standby (interest-only yr 1) | No | Note is fine, just does not count toward injection |
| Balloon inside SBA term | No | Prohibited if counting as equity |
| Reprice or accelerate clause | No | Kills the injection treatment |
The Language That Actually Holds
"Payments hereunder are subordinate in right of payment to the SBA loan and shall be deferred in full for a period of no less than twenty-four months from closing."
That is the sentence the lender is looking for on page one. If it is not there in that exact spirit, the lender's counsel will send it back for a redraft. It should not be buried in an addendum.
Forgiveness Triggers — The Real Alignment Mechanism
The best seller notes have a forgiveness trigger that ties principal reduction to something the seller actually controls at hand-off. The two that work: retention of a named key customer for eighteen months, or retention of a named key employee for twenty-four months. Vague performance triggers do not work — they invite litigation.
- ◆Name the trigger person or customer explicitly in the note.
- ◆Define the measurement window in months, not calendar quarters.
- ◆Cap the forgiveness at a percentage of the note face, not the whole balance.
- ◆Require written notice from buyer to seller before the trigger is deemed missed.
The Trigger Everyone Forgets
Death and disability. If the buyer is the personal guarantor and something happens, the seller note needs a clean path — insurance-funded, not litigation-funded. Write in a key-person life policy assignable to the seller for the outstanding note balance. Cheap. Fast. Removes the worst-case argument from the table on day one.
Where Sellers Push Back, And What To Give
Sellers almost always push on standby length and interest rate. Standby is not negotiable if the note counts toward injection — that is SBA, not us. Interest is negotiable, and the fair trade for a longer standby is a higher blended rate over the life of the note. Most deals land at seven to eight percent when standby runs the full twenty-four.
Structuring a seller note right now?
Book a call. We will red-pen your draft and tell you if it passes SBA credit committee before you send it to the lender.
Apply To Work With Us