What the note has to say
Principal. Interest. Amortization or interest-only. Maturity. Security, if any. Subordination to the senior lender. Default and acceleration. Whether the seller can take a payment while the 7(a) is outstanding. If SBA is in the room, read the standby definition before you call the paper “equity.”
SOP 50 10 8 still requires a 10% injection on change-of-ownership files inside the $5 million 7(a) box (Source: SBA). Current-pay seller paper does not fill that 10%.
Why notes appear on plant files
Valuation gap. Buyer cash. Seller tax timing. A lender who wants the seller to keep skin in the deal. BizBuySell’s 223-day manufacturing median close is not a reason to leave the note term blank until week twenty (Source: BizBuySell). Write the paper when you write the letter.
Federal Reserve 76.0% utilization does not make a note safer (Source: Federal Reserve G.17). Coverage still comes from the plant’s cash, not from a national print.
| Paper | Pays during 7(a)? | Counts toward 10%? |
|---|---|---|
| Current-pay seller note | Yes | No |
| Full standby for the 7(a) term | No | At most half of the 10% |
| Earn-out | If earned | No |
Who should not hold a large note?
A seller who needs the cash to retire, a seller who will not subordinate, or a buyer whose model only works if the note is quietly treated as equity. Jason Taken is a business broker. Educational information only. Counsel and the lender own the form of note.
How the note should be described in the CIM
State the maximum principal, whether it amortizes, whether it is secured, and whether it will be subordinated. Do not write “seller financing available” as if that were a structure. A 20% note that pays monthly is a debt stack. A 5% full-term standby is an injection conversation. Those sentences belong in different paragraphs.
Security is a fight. A second lien on the iron may be acceptable to one lender and forbidden by another. A note secured only by a personal guaranty is a different risk. Write the collateral. Write the default. Write whether the seller can accelerate if the buyer moves the work out of state.
Tax treatment is a CPA question. Some sellers care about installment treatment. That does not change the SOP test. The glossary will not invent a rate or an amortization table.
How a note changes the first-year cash picture
A current-pay note is a monthly obligation that sits next to the senior payment, the rebuild fund, and the working-capital cage. Write all four on one page before anyone celebrates the headline price. A full-term standby note does not create that monthly hole. It still creates a later balloon and a seller who will watch covenant defaults. Neither structure is free equity. The standby seller note definition covers the SOP half-injection test. This entry only names ordinary deferred price.
A seller funding retirement housing will press for current pay. A seller who remains as landlord may accept standby if the rent is real. Name which person you are before the letter. Jason Taken will not draft the instrument. Counsel will. After the debt label is straight, seller notes and standby is the SOP walk-through and a confidential intro call is the conversion path.
Do not describe the paper as “flexible seller financing” in a CIM. That phrase hides amortization, security, and whether anything is on standby. Name the principal, the pay flag, and the intercreditor. If those three facts are not ready, the letter is not ready. Census shop counts and national multiples do not write those three facts for you.
What a seller note is not
It is not cash at the table. It is not an earn-out keyed to a later metric. It is not SOP equity unless it is full-term standby, and even then it fills at most half of the 10%. A hallway that calls every carryback “seller financing” has collapsed three nouns. Keep this one as deferred price with a payment flag.
Most bank papers will say the seller cannot take a payment, cannot take collateral, and cannot sue while the senior loan is outstanding, except in narrow windows. If those words are unacceptable, do not sign a “light” note and hope. Ask for the intercreditor before anyone celebrates the headline price. If the buyer can relocate the cell and leave an unsecured promise, write that risk or take collateral the intercreditor will actually let you keep.