Seller notes, and why an SBA buyer cannot offer an earnout

The short version

• A seller note is part of the price paid to the seller over time, with interest.
• It lowers the cash you need at closing and keeps the seller invested in your success.
• With an SBA loan, a seller note sits behind the bank, and strict rules govern when the seller can be paid.
• An earnout ties part of the price to future results. If you use an SBA loan, earnouts are not allowed.
• SBA rules allow a different tool: a rebate from the seller if the business falls short, with the money paying down your loan.

Seller notes

A seller note is a loan from the seller to you for part of the price. For example, on a $1,500,000 purchase, the seller might receive $1,350,000 at closing and $150,000 as a note, paid over several years.

Why it helps you: less cash at closing, and a seller who has a reason to help the handover succeed.

Why sellers agree: it can bridge a price gap, help a buyer qualify for financing and show confidence in the business.

Seller notes with an SBA loan

If you use an SBA loan, rules effective October 1, 2026 (SOP 50 10 8.1) apply:

• The bank comes first. The seller note is subordinate to the SBA loan.
• Counting toward your 10 percent. You must put in at least 10 percent of the total cost of the purchase. A seller note can count toward that only if the seller receives no payments at all for the life of the SBA loan, called full standby. Even then, it can cover no more than half of your required amount.
• Other seller notes may allow payments, if the lender approves the terms.

Plan your seller note with your lender before you put it in your offer.

What an earnout is

An earnout is part of the purchase price that is paid after closing, and only if the business reaches agreed results. The seller receives a set amount at closing. The rest depends on how the business performs under your ownership.

Buyers and sellers use earnouts when they disagree about what the business will do next. The seller believes growth is coming. The buyer is not willing to pay for growth that has not happened yet. An earnout lets both be right: the seller is paid more if the growth arrives, and the buyer pays less if it does not.

An earnout agreement usually sets out:

• The measure. What is being tracked: revenue, gross profit, earnings or a specific result such as keeping a key customer.
• The target. The level the business must reach, often with tiers that pay more for higher results.
• The period. How long results are measured, often one to three years after closing.
• The maximum. The most the seller can earn.
• How it is calculated. Which accounting rules apply and which costs count, so neither side can move the numbers.
• When it is paid. Usually after each measurement period, once the results are final.
• How disputes are settled. Often by an independent accountant.

An earnout example

A buyer and seller agree on a business with $500,000 in SDE. The seller believes a new service line will add $100,000 a year in earnings. The buyer will not pay for that until it happens.

Line	Amount
Paid at closing	$1,600,000
Earnout, maximum	$400,000
Measure	Gross profit from the business
Period	Two years after closing
Target	$200,000 earned at the end of each year in which gross profit is at least $1,200,000

If the business hits the target both years, the seller receives the full $2,000,000. If it hits the target in one year, the seller receives $1,800,000. If it misses both years, the seller receives $1,600,000.

For the buyer, the risk of overpaying is lower. For the seller, a large part of the price depends on someone else running the business. That is why earnouts often lead to disputes: the seller no longer controls the results, and small choices about costs, pricing or accounting can decide whether a target is met.

Why an SBA buyer cannot offer an earnout

For buyers using an SBA loan, rules effective October 1, 2026 do not allow earnouts. The full price must be fixed at closing. A purchase like the example above could not be financed with an SBA loan as written.

Watch for disguised earnouts too. Payments to the seller after closing that rise or fall with the business's results, even if they are called consulting fees or bonuses, can be treated as an earnout. Any payment to the seller for work after closing should be a fixed amount for the work they actually do.

What SBA buyers can do instead: a rebate

If you and the seller disagree about how the business will perform, SBA rules allow a rebate:

1. You pay the full agreed price at closing.
2. You agree on a target the business should reach after closing, such as revenue or earnings over a year or two.
3. If it falls short, the seller pays back an agreed amount.
4. That money goes to your lender and pays down your SBA loan.

It protects you if a key customer leaves or the earnings were overstated. Some agreements hold part of the price in escrow, with a neutral third party, until the target period ends. Your lender must approve the terms.

Buyers not using an SBA loan

Earnouts are allowed. If you use one, define every term in the purchase agreement precisely, keep the measure simple and tie it to something the seller can still influence during a handover, such as revenue from customers they introduce.