How to Structure a Business Acquisition: Seller Notes, Earnouts and SBA Rules

Most buyers walk into a negotiation with one number in their head. The price. They fight for it, they win a little, and they sign. Then they spend the next three years discovering that the price was never the thing that decided whether the deal worked.

The structure decides that. How much cash moves at close, how much the seller carries, how much rides on the business actually performing, what the bank will lend, and what that debt costs. Five numbers, not one. If you only negotiate the first, you have handed the other four to whoever is on the other side of the table.

This guide walks through how to structure a business acquisition in the lower middle market, with the pieces that matter in 2026: seller notes, earnouts, SBA 7(a) rules, and where family office capital fits.

Price is what the seller tells his friends. Structure is what you actually pay, when you pay it, and what happens if the business does not do what the CIM said it would.

A business that sells for $18 million with $11 million at close and $7 million deferred is not the same deal as $18 million all cash. The second buyer has every dollar at risk on day one. The first buyer has the seller's own money sitting behind the forecast.

Here is the part people miss. The seller often prefers the structured deal, because it lets him get his number. Buyers who understand this stop arguing about the headline and start arguing about the shape.

1. Cash at close. What the seller walks away with on the day. Funded by bank debt plus buyer equity. The bigger this number, the more leverage sits on the business and the thinner your cushion.

2. Seller note. A loan from the seller to the buyer, paid back over time. Usually subordinated to the bank. It aligns the seller with the business surviving and it reduces how much you need to borrow from an institution.

3. Earnout. Money paid only if the business hits agreed targets after closing. Revenue, EBITDA, customer retention. It bridges the gap between what the seller believes and what you can prove.

4. Bank debt. For deals under $5 million, usually SBA 7(a). Above that, conventional or private credit. The amount depends on cash flow coverage and collateral.

5. Cost of that debt. The rate, the term, and the covenants. This number moved in September 2026 and it changed the math on every deal in the pipeline.

The Federal Reserve raised the federal funds rate to a range of 3.75% to 4.00% on September 16, 2026. SBA 7(a) loans price off prime, which sat at 6.75% going into that meeting, with variable rates on loans over $250,000 capped at prime plus 3% per Lendio. Every quarter point flows straight into your monthly payment and straight out of your debt service coverage.

At the same time, family office capital moved the other direction. In FINTRX's Q2 2026 report, 92.7% of newly formed family offices said they want direct deals. Only 6.3% wanted private credit. More families want to own a piece of the company rather than lend to it. For a buyer, that is an equity partner on the sidelines who will take a smaller slice of a well structured deal than a bank will take in interest.

And earnouts are no longer unusual. SRS Acquiom's 2026 deal terms report puts earnouts in 29% of lower middle market deals under $50 million and 35% of deals under $25 million. If you are a seller who refuses to discuss one, you are now refusing a third of the market.

An illustrative example. Not a real deal, not a client, just the math.

A services business with $3 million of EBITDA. The seller wants 6x. That is $18 million.

Buyer A fights on price and gets it to $15.5 million, all cash at close. Bank debt on most of it at today's rates. One soft quarter and the coverage ratio gets tight. The bank starts calling.

Buyer B pays the full $18 million, structured:

Buyer B paid the seller's number. Buyer B also put less bank debt on the business, put the seller's own money behind the forecast, and only pays the last $3 million if the forecast comes true.

If EBITDA holds, Buyer B paid $18 million for a business that earned it. If EBITDA slips, Buyer B paid $15 million and the seller took the miss. Higher headline price, lower risk. The seller gets to say he got his number, and he did.

On a 7(a) acquisition loan, a seller note can count toward the buyer's 10% equity injection, but only if it sits on full standby for 24 months: no principal and no interest, per this breakdown of the standby rules.

Read that twice if you are a seller. The note is not a favor to the buyer. It is the price of a bank saying yes to the deal at all. A seller who refuses to carry paper is often refusing the only financing path that gets him to close.

For buyers, the standby note is the cheapest equity you will ever find. It costs you nothing for two years and it replaces cash you would otherwise have to raise.

Buyers: on your next letter of intent, write two versions. One at a lower price, all cash. One at the seller's price with a note and an earnout. Show both. Let the seller choose between his number with structure or a smaller number with certainty. Most sellers choose the number. You win either way.

Owners preparing to sell: decide today what you would carry. Amount, rate, years. Have it ready before the LOI arrives, not after. A seller who shows up with a structure already in mind controls the conversation instead of reacting to it.

The bank gets most deals most of the way. The gap between what the bank will lend and what the seller wants at close is where deals die, and it is also where the opportunity is. That gap gets filled by buyer equity, a seller note, an earnout, or a bridge from a lender who understands the asset.

FM Enterprises works on both sides of that gap. We buy businesses in tech enabled services, healthcare, manufacturing and cash flow services, and we arrange bridge and asset backed capital for buyers who have the bank commitment but need to close the last mile. If you have a deal that fits, bring it to us. If you own a business you are thinking about selling, start here.

For the balance sheet side of this analysis, see how the balance sheet strategy works for acquisitions under $100 million.

What is a typical seller note in a small business acquisition? In the lower middle market, 10% to 30% of the purchase price, five to seven year term, interest in the 6% to 8% range, subordinated to the bank. On SBA deals, the portion counted toward equity must be on full standby for 24 months.

How is an earnout structured? A target (usually EBITDA or revenue), a measurement period (one to three years), a payout formula, and a cap. The cleaner the metric, the fewer disputes. Avoid metrics the buyer can manipulate after closing, or the seller will refuse it.

Can you use a seller note as the SBA equity injection? Partly. Under current 7(a) rules, a seller note on full standby for 24 months can count toward the 10% injection. The rest must come from the buyer or an outside equity investor.

What is a good debt service coverage ratio for an acquisition? Most lenders want 1.25x or better after the new debt is layered on. At today's rates, that constraint is what pushes buyers toward seller notes and earnouts instead of more bank debt.

This article is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities, financial instruments, or investment products. FM Enterprises and Fadi Malouf do not provide legal, tax, investment, or financial advice. Any business, acquisition, or capital related discussion is subject to further review, appropriate due diligence, and applicable professional guidance.