Key Takeaways
- SBA loans require a seller note (typically 10% of purchase price) placed on 24-month standby — on a $10M deal, $1M may be inaccessible for two years post-close.
- SBA buyers can bid higher headline prices (10–15% equity vs. 30–50% for PE), but closing risk is materially higher due to bank underwriting and mandatory SBA appraisal requirements.
- Evaluate offers on total net proceeds and closing certainty, not headline price — a lower all-cash PE offer frequently outperforms an SBA offer in net present value terms.
When you receive an LOI, the headline price matters — but so does what's behind it. Whether your buyer is using SBA 7(a) financing or conventional (non-SBA) debt changes the deal mechanics in ways that affect your net proceeds, your timeline, and your ongoing risk exposure.
Here's what you need to know before you sign an LOI from a buyer using SBA financing.
The Basics: How Each Works
| Factor | SBA 7(a) | Conventional / PE |
|---|---|---|
| Maximum loan size | $5M (SBA guaranteed) | No statutory limit |
| Typical deal size | Under $15M enterprise value | $10M+ (no ceiling) |
| Equity requirement | 10–15% buyer equity | 30–50% PE equity |
| Seller note requirement | Often required (10%) | Negotiated, often none |
| Close timeline | 60–90 days (bank-dependent) | 45–75 days |
| Standby period on seller note | 24 months mandatory | Negotiated |
The Seller Note Issue
SBA lenders frequently require the seller to carry a note — typically 10% of the purchase price — as a condition of approving the loan. This is a meaningful distinction from conventional deals. In an SBA transaction, your seller note is often placed on "standby" for 24 months post-close, meaning you cannot receive payments on it while the SBA loan is in its early phase.
How It Affects Price
SBA buyers often bid higher headline prices because their personal equity requirement is lower (10–15% vs. 30–50% for PE). A buyer putting $1.5M down can bid $10M with SBA financing — the same buyer without SBA access might only be able to offer $5M conventionally.
This creates a nuanced tradeoff: the SBA buyer may have the highest headline offer, but the actual structure (seller note, standby, closing risk) may make a lower all-cash PE offer more valuable in net present value terms.
The Closing Risk Difference
SBA loans have a meaningful failure rate at the conditional approval stage. Bank underwriting standards, SBA guarantee requirements, and third-party appraisal requirements (the SBA requires an independent business valuation) all create friction that conventional deals don't have.
In a conventional PE or institutional deal, if the buyer has committed equity and a lender in place, closing risk is lower. The process is faster, the conditionality is narrower, and there are fewer third parties who can slow or kill the deal.
What to Negotiate If You Take an SBA Offer
- Minimize the seller note. Push to eliminate it or reduce to the SBA minimum. Every dollar in the seller note is a dollar at risk.
- Shorten the standby period. SBA rules set a 24-month floor, but negotiate any payments you can outside the standby structure.
- Require a deposit at LOI. Non-refundable deposits (even $25–50K) screen out tire-kickers and signal buyer seriousness.
- Cap the due diligence period. SBA transactions have more moving pieces; build a hard timeline into the LOI.
- Require business valuation in advance. SBA appraisals sometimes come in below the agreed price, triggering renegotiation. Ask to see the appraisal methodology before signing.
Bottom line: SBA financing is not inherently bad for sellers — it enables buyers who couldn't otherwise participate, which increases buyer pool and competition. But the deal structure is different and requires specific protections. Evaluate total net proceeds and risk, not just the headline number.
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