The test that people fail in the LOI
They write “seller carry 5% on standby” and then add a monthly coupon. A coupon is a payment. SOP 50 10 8’s equity test is no principal and no interest for the life of the guaranteed loan. 7(a) for manufacturing acquisitions restates the $5 million cap and the 10% injection (Source: SBA).
At most half of that 10% may be standby paper. The other half is cash or other true equity. Do not build a letter that only works if the whole 10% is a note.
Why sellers still agree
To close a gap. To keep a relationship with the plant. To help a searcher who has the other 5% in cash. Census CBP 2023’s 284,452 establishments are mostly small enough that a 5% standby note is a retirement conversation, not a rounding error (Source: Census CBP). Write the cash-flow consequence for the seller.
BizBuySell’s 2.75x SDE median does not change the SOP math (Source: BizBuySell). Multiples do not create injections.
| Label in the LOI | SOP equity credit? |
|---|---|
| “Standby” but monthly interest | No |
| Full term, no pay, subordinated | Up to half of the 10% |
| Current-pay subordinated note | Debt, not equity |
| Earn-out labeled “equity” | No |
Who confirms the form of note?
The SBA lender and counsel. Jason Taken is a business broker. He will not certify a note as SOP-compliant. Educational information only.
Why sellers misunderstand “standby” in the first call
They hear “the bank wants you to carry 5%” and assume a coupon. They hear “subordinated” and assume they can still take interest. They hear “equity” and assume the note is safe because the buyer called it that. SOP 50 10 8 does not care about the hallway language. It cares whether cash left the buyer to the seller during the guaranteed term.
If the seller needs income, this is the wrong instrument. Use a smaller price, a current-pay note that is honestly labeled debt, or a different buyer. Do not paper a retirement on a note that cannot pay.
If the buyer needs the 10% to look smaller, this is also the wrong instrument. Half of 10% is 5%. The other 5% is still cash or true equity. Equity injection is that noun. 7(a) is the box. Census CBP 2023’s 68.4% under-20 share is why many sellers are individuals who will feel a zero-coupon decade (Source: Census CBP). Say that out loud.
The glossary exists so “standby” is not a sticker you put on any seller paper.
Isolation
The glossary keeps standby from collapsing into “seller financing.” The FAQ holds the question. When the injection mix is the actual fight, book a confidential intro call.
How to explain a zero-coupon decade to a household
The seller is lending the buyer money they cannot touch until the 7(a) is gone. That can be the right trade to get a deal done. It is a terrible surprise at a kitchen table. Write the cash-flow consequence in the first process memo, not in a closing binder.
If the household needs income, change the structure. Do not relabel interest as a “consulting fee” to dodge the SOP test. Lenders have seen that. Counsel will kill it. This noun stays no-pay paper.
Consulting fees that try to replace the coupon
Lenders read the consulting agreement. If it pays the seller every month for “advice” they are not giving, it is a coupon. It will not count as standby. It may also fail the injection test. Write a real transition plan with a real end date, or write no-pay paper. Do not write both as if they were clever.
A CIM should not say “seller financing available” when the paper is meant to be full-term standby. Those are different nouns. Bring the household cash-flow consequence of a zero-coupon term and the other half of the 10% that still must be cash. If either is missing, this is the wrong instrument. Seller notes and standby walks the SOP test. After the no-pay noun is straight, a confidential intro call is the conversion path.
What standby is not
It is not a current-pay seller note. It is not a consulting fee that pays every month for advice the seller is not giving. Half of 10% is 5%. The other 5% is still cash or true equity. Equity injection is that noun. If the household needs income, this is the wrong instrument. Census CBP 2023’s 68.4% under-20 share is why many sellers are individuals who will feel a zero-coupon decade (Source: Census CBP). Say that out loud before anyone writes the paper.