Start with the current hard edges. For complete changes of ownership above $500,000, SBA’s current framework still generally requires a 10% equity injection. The 7(a) maximum loan amount is still $5 million. And, as of April 11, 2026, prime remains 6.75%, and the published SBA variable-rate ceiling on most loans above $350,000 remains prime plus 3.0%, or 9.75%. That means sellers should assume senior debt is expensive enough that lenders are looking closely at combined debt service, not just senior debt in isolation.<\/p>\n
Take a clean Indiana example. Purchase price is $2.4 million. Buyer contributes $240,000 of equity. Senior SBA debt is $1.8 million. Seller carries a $360,000 note at 8% over 60 months. Annual debt service on the senior debt at 9.75% over 10 years is about $282,464. Annual debt service on the seller note is about $87,594. Combined annual debt service is roughly $370,058. If the business has dependable post-normalization cash flow of $500,000 after paying a real replacement operator, combined debt-service coverage is about 1.35x. That is workable in many files.<\/p>\n
Now change only one variable. Same $2.4 million purchase price, same $240,000 buyer equity, but the buyer asks you to carry $600,000 over five years at 7%, which lets the senior debt shrink to $1.56 million. Many sellers assume that is safer because the bank debt is lower. Not necessarily. The smaller senior note carries about $244,802 of annual debt service, but the seller note now carries about $142,569 annually. Total annual debt service is roughly $387,371, higher than the first structure because the junior paper amortizes faster. A bigger seller note with a short clock can make the file tighter, not easier.<\/p>\n
That is the first stacking rule sellers miss: do not look only at note size. Look at combined payment burden. The second rule is documentary. If the lender allows seller debt to support the buyer’s injection or otherwise sits close to the equity line, expect the seller note to be on strict standby terms. In practice, that usually means the seller signs a standby creditor agreement, agrees to be subordinate to the senior lender, and gives up the right to collect or enforce freely while the senior lender is exposed.<\/p>\n
The third rule is practical. A note can be technically allowed and still be commercially bad for the seller. If the lender demands full standby for an extended period, prohibits payments without consent, and bars remedies unless the senior debt is current or paid off, the seller should stop treating the note like retirement cash flow. It is deferred, junior recovery value. Price it that way. If you need reliable monthly income immediately after closing, a deep standby note may be the wrong structure even if the deal will technically close.<\/p>\n
The fourth rule is that SBA paper does not excuse bad underwriting. If the business only works when the buyer brings light cash, the bank stretches, the seller carries too much paper, and the first year goes perfectly, that is not a good seller-financed business sale. That is a fragile one. The right seller-side move is often to reduce the price, find a stronger buyer, or keep the note smaller and safer.<\/p>\n
In the Indiana market, the most stable SBA plus seller-note structures still tend to look like this: 10% buyer equity, a senior note sized to real normalized cash flow, and seller paper in roughly the 10% to 15% range, with the note clearly junior and documented early enough that the lender is not fighting the form at the end. Once the buyer starts asking for a seller note, an earnout, a large escrow, and loose working-capital assumptions in the same deal, you are not looking at smart structure. You are looking at too many claims on the same cash flow.<\/p>\n<\/section>\n\nCollateral and Security Interests on the Seller Note<\/h2>\n A seller note without a security conversation is just optimism with paper clipped to it. The seller does not need to win every lien fight, but the seller does need to know what is actually securing the obligation and what is not.<\/p>\n
In an asset sale, the seller usually wants a security interest in the business assets being transferred: accounts receivable, inventory, equipment, furniture, fixtures, and general intangibles. In a stock or membership-interest sale, the cleaner seller-side protection is often an equity pledge, meaning the buyer pledges the acquired stock or membership interests back to the seller as collateral. On paper, that can be strong. In practice, the senior lender may still hold the better position or restrict enforcement.<\/p>\n
Most financed Indiana deals place the senior lender in first position and the seller in second position or unsecured status. That is normal. What is not normal is acting like second position is the same thing as real first-dollar collateral. If the bank sweeps receivables, inventory, and equipment first, the seller’s junior lien may be worth much less than the collateral description suggests. That does not make junior security useless. It does mean the seller should pair it with other protection: a personal guaranty from the buyer, an equity pledge, insurance requirements, and ongoing reporting covenants.<\/p>\n
For a modest note to a very strong buyer, unsecured paper can be acceptable. For a larger seller carry back on a newly acquired company, unsecured is usually lazy. If the note is 15% of purchase price or more and the buyer resists both security and a personal guaranty, the seller should hear the message clearly: the buyer wants seller capital without seller remedies.<\/p>\n<\/section>\n\nDefault Protection: What Rights You Actually Have Post-Close<\/h2>\n The legal documents will tell you that you have rights after default. The real question is how usable those rights are once senior debt, subordination language, and the condition of the business are taken into account. Sellers need to think about default protection in practical order, not just legal order.<\/p>\n
Start with the note itself. It should define payment default, covenant default, bankruptcy default, unauthorized asset transfers, and cross-default to senior debt if that is part of the bargain. It should also define cure periods narrowly enough that the buyer cannot drag obvious trouble out for months. Late charges, default interest, attorney-fee shifting, and acceleration are standard, but they are only the first layer.<\/p>\n
The second layer is information. A seller who carries paper should not close blind and then wait for missed payments to discover trouble. The note package should require regular financial reporting, tax-return delivery, notice of senior-lender default, and notice of material litigation or lien activity. In a lot of Indiana service and light-manufacturing deals, the first warning sign is not a missed seller-note payment. It is margin compression, inventory stretch, or payroll tax stress that shows up in the monthly numbers first.<\/p>\n
The third layer is guaranty structure. If the buyer is an acquisition LLC with no assets other than the target, a note with no personal guaranty may leave the seller chasing a thin shell if performance deteriorates. A full guaranty is not always available, especially with institutional or sponsored buyers, but sellers should understand the trade. If you do not have a first lien, do not have a personal guaranty, and do not have current financial reporting, your post-close rights are much weaker than the purchase-price headline suggests.<\/p>\n
Finally, understand what recovery looks like in time, not just in theory. Suing on the note may take money and months. Enforcing against collateral may require lender consent. Taking back equity in a distressed company is not the same thing as receiving cash. A seller note default is not automatically a clean repossession story. Sometimes it is a workout. Sometimes it is a settlement. Sometimes it is proof that the seller should never have carried that amount in the first place.<\/p>\n
The right seller mindset is blunt: the best default protection is a note you can reasonably expect to be paid, not a thick remedy section drafted after a weak underwriting decision.<\/p>\n<\/section>\n\nSubordination and Standstill Provisions That Favor the Senior Lender<\/h2>\n Subordination is where many sellers discover they are not holding an ordinary note. They are holding junior paper inside someone else’s credit structure. If the buyer has bank debt or SBA-backed debt, expect the senior lender’s form to do exactly what it is supposed to do: protect the senior lender first.<\/p>\n
A standard subordinated-note package often restricts payments after a senior default, blocks acceleration without lender consent, bars foreclosure or UCC remedies during a standstill period, and requires the seller to turn over funds received in violation of the agreement. The seller may also be barred from amending the note, taking additional collateral, or accepting prepayments without senior-lender consent. Those are not drafting quirks. They are the point of the document.<\/p>\n
In SBA-related structures, that effect can be even more obvious because standby documentation is built specifically to keep seller debt from interfering with senior repayment. If your note is on full standby, your paper may still accrue interest, but your practical ability to collect during the standby period can be severely limited. Sellers who intend to use note payments to cover living expenses should confront that before the LOI, not after counsel circulates subordination language.<\/p>\n
The right response is not to panic every time a lender asks for subordination. Junior paper is common. The right response is to price the restriction, cap it where possible, and understand exactly when payments can resume and what events trigger blockage. If the senior lender wants broad standstill rights and the buyer is already asking for a large seller note, the seller should either reduce the amount of paper, increase the rate, or reject the structure. Risk that is both junior and underpriced is bad business.<\/p>\n<\/section>\n
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