Why should buyer and deal financing be addressed early on?

Look at Financing Considerations Early in The Process If external financing will be required for the advisor acquisition, then the deal must match bank requirements, not the other way around. Acquisition deals can implode in the end when lending due diligence isn’t done in the beginning. If the acquisition deal or structure can't get financed, what’s the point of everything else?

This scenario plays out regularly in the industry: Buyer and seller have already worked out the acquisition deal structure and terms, hired a lawyer to develop the purchase agreement, paid for a business valuation, and set the closing date. Then, after all that time, money, and effort was spent, they look into the financing only to find out that the deal can’t be financed at all, or that it needs to be re-structured in order to comply with the financing option or lender the buying advisor qualifies for and with.

If external financing will be needed for the acquisition deal to close, then external financing becomes one of the most important aspects of the acquisition deal. Buyers getting pre-qualified at the beginning of the process is critical for both buyer and seller.

External financing will heavily influence the acquisition terms and structure. External financing will dictate requirements around loan amount, cash injection requirements, promissory note amount, type and structure, closing timeline, retention provisions, and more.

Does the seller need to finance a portion of the purchase?

• For the vast majority of the acquisition loans we do, the seller doesn’t"need" to finance any portion of the purchase.
• Sellers “can” seller finance any amount of the purchase with a promissory note but have to subordinate that note to the lender’s note.

When is seller financing potentially needed?

• W2 advisors, advisors without production, and advisors whose practice has too low of a value compared to the seller practice value being acquired.
• If the deal isn’t cash flowing strong enough or the lender has other concerns about the deal, the lender may require the seller to finance a portion of the purchase. In these cases, a 20-25% seller note is the typical percentage the lender would require.

What is the SBA equity injection seller standby note?

If your buyer is utilizing an SBA loan to finance the purchase of your book or practice then the buyer’s down payment requirement depends on if it’s considered an expansion acquisition. In most all cases when an established independent advisor or firm is acquiring your business with an SBA loan they will not be required to make a down payment and you will not be required by the lender to seller finance a portion of the sale.

However for book and practice acquisitions where the buyer is currently 100% W2 or has issues for whatever reasons with coming up with the full 10% cash for the required equity injection, there is an option for you as the seller to step in and help in a big way, all with minimal exposure to you. Seller notes allow the seller to finance part of the equity injection, reducing the buyer’s upfront cash need.

Full Standby Note: Can cover up to 50% of the 10% injection (e.g., $50,000 for a $1 million project, with the remaining $50,000 from buyer/borrower sources like cash).

Terms: No principal or interest payments for the entire term of the 7(a) loan, which is a ten-year term. The note must be subordinated to the SBA loan with no acceleration clauses.

Here’s how it works: An SBA acquisition loan allows for attrition offsets, hold-backs and clawbacks, and any additional seller financing are eligible elements in an acquisition payment structure. This example doesn’t account for additional deal components.

Upfront Cash: You could receive 95% of the purchase price (up to the SBA-approved valuation) in cash at closing, funded by the SBA loan and the buyer’s cash contribution.

Standby Note: The remaining 5% is a 10-year standby note from you to the buyer, with no principal or interest payments during the SBA loan term (typically 10 years). At maturity, the buyer pays the principal plus accrued interest (e.g., 6-9%, negotiable) in a lump sum.

Subordinated Lien: You hold a subordinated lien on the practice’s assets, behind the lender’s first lien, securing your claim if the buyer defaults (though secondary to the lender) or sells.

Example: You sell your practice for $1 million (SBA-approved valuation). The buyer needs a $100,000 equity injection (10% of project costs, including price, fees, and working capital). You provide a $50,000 standby note at 9% simple interest. At closing, you receive $950,000 in cash. In 10 years, you collect $95,000 ($50,000 principal + $45,000 interest).

Do all seller notes have to be on a “standby” period?

The only seller note that the SBA requires to be on standby for the two year standby note as part of the SBA equity injection requirement. "Standby" means that while interest can accrue, no payments can be made to the seller while the buyer/borrower’s SBA loan is still active.

If the seller did "inject" 10% of the equity with a seller note that is on standby, any additional seller note would not be subject to the standby rule. For example, a seller can have the 10% seller note on standby but have another 20% seller note that is paid over 5 years.

Are seller promissory notes subordinated to the lender?

For bank financed deals, both SBA and conventional, the lenders we work with will require the seller to subordinate the promissory note. It doesn’t matter if the bank is financing a minority or majority of the purchase price, a subordination letter will be required for most every acquisition loan. The lender provides the subordination letter that must be executed by the seller. However, our lenders do not require any previous seller notes to be subordinated if there isn't a lien filed.

Why aren’t sellers typically financing much anymore?

Seller financing is still common and frequently used when the broker dealer is lending up to 50% of the acquisition to the buyer and the seller finances the rest in either a fixed note or earn out. Seller notes are also common when an advisor purchases clients from another advisor they know, and pays part from cash on hand and the seller finances the rest.

But when the deal is being financed by a conventional or SBA loan (especially SBA), there is no seller financing involved for the majority of deals we’re seeing.

Here are the key reasons why:

• In 2018, the SBA changed their acquisition equity injection rules. Before the change, the SBA used to require the seller to finance 25% of the purchase price. The new equity injection rule no longer requires (but allows) seller financing. Conventional lenders we work with who also used to insist on some level of seller financing component, have been doing most of their deals over the last few years without a seller note and utilizing an escrow agreement to satisfy retention/claw-back provisions.

• Most seller notes are structured from 3 to 5 year terms compared to the 10 year terms offered by conventional and SBA loans. Borrowers often prefer the additional cash flow generated from the longer amortization of the bank loan, over saving a percentage point or two from the seller note.

• In the competitive M&A landscape, where there are many buyers and few sellers in comparison, buyers utilizing external financing are able to utilize 100% financed loans as a competitive advantage in their offer. With all else equal, most sellers would rather accept the offer where they get most all of their money upfront and bear little risk other than the portion set aside for limited attrition protection. This is more attractive than a slightly larger offer but only half the money up front and the seller bears all the risk for the rest.

• Any seller promissory note has to be subordinated to the lender note regardless of the percentage of the purchase the seller finances. This is extra risk to the seller since they would not be able to collect in a default scenario until the bank is satisfied. The bank can also halt their borrower (the seller’s buyer) from making the seller note payments if cash flow gets tight causing the borrower to struggle to make the monthly bank payments.

• For acquisition loans today, the escrow agreement has replaced the seller note being required from the borrower for a retention/claw-back period. The escrow structure allows for the amount to be set aside and disbursed according to the time tables and claw-back formulas laid out in the agreement. The seller often prefers this since they know the money is in an account waiting for them.

When are seller promissory notes being utilized?

• The broker dealer is lending up to 50% of the acquisition to the buyer and the seller finances the rest in either a fixed note or earn out.

• When two advisors who know each other goes old school where a small percentage is paid in cash and the seller finances the rest with a promissory note.

• When an advisor uses a lender that just isn’t comfortable with 100% bank financing.

• When the buyer is W2, novice, or without production.

• Buyer whose practice has too low of a business value compared to the seller practice value being acquired.

• When the deal doesn’t cash flow strong enough, the LTV is too high, or the lender has other concerns about the deal.

• When the purchase price is higher than the valuation, the difference must be structured in a seller promissory note for SBA loans.

• The seller insists on having a seller note in place because they want to receive payments over many years.

What about post-sale seller involvment?

Staying on as an employee post-sale depends on the buyer’s loan type. For SBA loans, retained equity with an active role (e.g., as an employee) is generally prohibited, as SBA rules prioritize immediate ownership transfer, limiting structures like phased equity sales or ongoing involvement. However, conventional loans offer more flexibility, allowing sellers to retain equity (e.g., 10%) and stay involved in roles such as management, which could be negotiated with the buyer.

What is the Seller LoanAbility Analysis?

The Loanability Analysis is an automated evaluation that assesses a seller’s business from a lender’s perspective to determine its potential for securing bank financing for a buyer. By completing questionnaires, sellers receive a prequalification letter detailing the most likely loan structure, such as whether 100% financing is feasible or if partial financing with seller contributions is required. This analysis provides clarity on financing options, helping sellers align expectations, target suitable buyers, and plan payment structures that meet their financial goals.

Loanability Pre-Approval is the next step after the Loanability Analysis, involving a human review and lender engagement. Sellers upload required documents (e.g., financial statements, tax returns) and schedule a discovery call with an AdvisorLoans Advisor. The advisor reviews the analysis inputs and documents to address potential issues, discuss seller objectives, and outline financing structures. A pre-approval letter is issued, confirming the loan structure and terms a buyer could likely secure.