The loan type a buyer secures to finance the acquisition of a financial practice plays a crucial role in shaping the payment methods available to the seller. Whether the buyer qualifies for a conventional loan or one backed by the Small Business Administration (SBA) directly impacts how the transaction unfolds. Conventional loans typically offer more flexibility, but they often come with stricter qualifying requirements. In contrast, SBA loans may be more accessible for some buyers, yet they come with specific rules that influence the deal structure.

For sellers looking to transition out of their practice gradually through phased equity sales or those wanting to retain a certain level of equity, it’s essential that the selected loan program aligns with these goals. Factors like seller notes, claw backs, and earn-out arrangements are handled differently under each loan type. Conventional loans tend to be less prescriptive, while SBA loans often have strict guidelines regarding earn-outs to ensure compliance with regulations that protect the SBA's interests.

Why does this matter for sellers? Understanding the differences between loan types is vital, as this knowledge impacts the seller's liquidity and risk after the transaction. Sellers need to consider the financing options their potential buyers qualify for early in the process to ensure their desired transaction structure is viable. If a buyer's financing options are limited or misaligned with the seller's proposed structure, it may necessitate a re-evaluation of the transaction terms or even the search for another buyer who meets the preferred criteria. Consequently, negotiating these elements requires foresight and a keen understanding of specific loan terms to avoid any unintended constraints on the deal structure that could jeopardize the seller's payment terms.

While most sellers have an idea that SBA and conventional loans may have different rules lets go over more precisely how depending on SBA or conventional, and which lender the buyer uses impacts the selling advisor.

The Importance of Understanding Your Buyer’s Loan Qualification

External financing is crucial for your buyer's ability to acquire your practice. Most buyers will likely rely on either a conventional loan or an SBA loan to finance their purchase, each coming with distinct qualifying requirements and restrictions related to acquisition or equity buyout structures. While there is considerable flexibility in structuring a deal between buyers and sellers, that flexibility has limits when financing is involved. It cannot extend beyond the parameters established by the specific loan program and lender.

How a Buyer’s Loan Affects Payment Structure Options

Typically, buyers will use either a conventional loan or an SBA loan for financing. Although there is ample room for negotiation in deal structuring, if bank financing is necessary, the options will be confined to what the specific loan program and lender permit.

Payment structures permitted under a conventional loan differ significantly from those under an SBA loan. SBA loans have clearly defined parameters regarding acquisition structure types and provisions. Consequently, the type of loan—conventional or SBA—that the buyer secures, along with the particular lender, will influence the payment structures available to the seller.

If you value an earn-out structure, prefer to sell equity in tranches over time, or wish to maintain a key role years after the sale, it is essential for the buyer to qualify for a conventional loan, which typically has stricter qualifying criteria than an SBA loan. These options are generally not feasible under an SBA loan.

If Payment Method is as Important as the Sale Price

For many sellers, the sale price is just one consideration; the payment method is equally significant. Most sellers prefer to receive as much as possible upfront at closing, while some may want part of the payment spread over multiple years. Others might opt for an earn-out, receiving a percentage of revenues or profits over several years. These payment structures are common in wealth management mergers and acquisitions. However, if a buyer requires external bank financing to purchase your premium-priced practice, not all payment structures will be available to them.

Seller Guaranty

If your buyer chooses a conventional loan but doesn't qualify on their own, a seller guarantee may be necessary to go conventional. Internal successors with insufficient equity or client assets, as well as employee-based successors, typically require these guarantees or grantor agreements. For SBA loans, a seller guarantee is not needed except in a partner buy-in scenario where any remaining 20% partners also have to be a personal guarantor on the loan.

Target Buyers Who Qualify for the Desired Loan Structure

If a specific loan program does not support the structure the seller desires, it’s vital to assess whether potential buyers qualify for a loan program that does. Unfortunately, many prospective buyers are unaware of their financing options. While many buyers are actively seeking opportunities, most haven’t taken the time to prequalify for external financing. First-time buyers, in particular, may not know if they qualify for a conventional loan, an SBA loan, or any bank loan at all.

Just because a “larger producer” expresses interest in acquiring your practice doesn’t guarantee they will qualify for a loan that permits your preferred payment structure. Some advisors and firms with substantial assets under management (AUM) and revenue may carry significant overhead and debt obligations from previous acquisitions, limiting their capacity for additional debt.

Even if your potential buyer has financed multiple prior acquisitions, this does not ensure they will qualify for financing for your sale. Advisors heavily engaged in acquisitions may already be leveraged to a point where approval for another loan could take a year or more.

When considering selling your practice, it’s prudent and efficient to focus on prospective buyers who are pre-qualified for financing that aligns with both the amount you want to be paid and the method of payment.

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.

Get 95% cash and a 5% promissory note on a 10 year standby

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:

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., 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).

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).

Attrition offsets, hold-backs and clawbacks, as well as any additional seller financing without a standby period can be included in the payment structures.

FINANCING CONSIDERATIONS

If the acquisition needs bank financing, then if it can’t get financed, what’s the point of everything else?

Address Financing Before Solidifying Deal Terms

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.

Financing Touches Everything

For an acquisition loan the lender touches about every aspect of the deal. Borrower qualification, loan amount, deal and payment structures, down payments, seller financing and seller note standby and subordination, purchase agreement, collateral, business valuations, insurance, and lien requirements, to just name a few items the bank is involved with in some way.

If an advisor buyer only qualifies for an SBA loan then the deal has to comply with not only SBA requirements but also any additional requirements a willing SBA lender has as well.

Conventional lenders have their own set of requirements that in some cases are more lenient than the SBA and in other cases, are not. SBA has their policies and then each SBA lender adds their bank policies on top of the SBA policies.

Whether you are a buyer or seller, the first step of acquisition deal due diligence should be focused on the financing component. The acquisition deal viability and structure can then be determined and developed in compliance with the financing requirements.

Buyers need to know what purchase amount they are able to finance and if they would be likely an SBA or conventional loan before jumping into bidding or sourcing potential sellers.

Loan Influence on Seller Payment Structures