Jason Taken will not draft your note. HedgeStone will not let a CIM treat paper as cash. SBA buyers live inside these rules. This page is the seller’s ledger.
What is an amortizing note versus a standby note versus an earn-out?
Amortizing note: you are a creditor. You want security, a rate, a schedule, and a default path. That note generally does not count as the buyer’s SBA equity injection.
Standby note as equity: SOP 50 10 8 allows a seller note to count toward the 10% injection only if it is on full standby — no principal and no interest — for the life of the 7(a), and only up to half the injection (Source: SBA). The common math on a 10% deal is 5% cash plus 5% standby. You are not paid on that slice until the 7(a) is gone. Price that wait.
Earn-out: contingent purchase price. Not financing for many lenders’ DSCR. Not cash until the metric hits. Concentration is the usual reason. Quality gates and backlog consent are others.
| Instrument | Seller cash timing | Typical use | Seller risk |
|---|---|---|---|
| Cash at close | Immediate | Base price | Low |
| Amortizing note | Scheduled | Gap above cash / SBA | Buyer credit |
| Full-standby note | After the 7(a) | SBA equity math | Time + credit |
| Earn-out | If metric hits | Whale / backlog | Measurement fights |
| Rollover | Second bite if any | PE / sponsor | Equity risk |
IBBA Market Pulse Q1 2026 describes majority cash across size bands in the highlight charts; this site will not invent a single cash-at-close percentage (Source: IBBA). Paper still appears, especially above SBA capacity and on gated files.
The 7(a) cap remains $5 million (Source: SBA). SOP 50 10 8.1 applies to loan numbers issued on or after 2026-10-01. Confirm the live SOP. Do not freeze a blog.
How do you write an earn-out you can actually collect?
Name the accounts or the SKUs. Use gross profit you can audit from invoices, not EBITDA after corporate allocations, new management fees, and “synergy.” Set a volume floor so a buyer cannot starve the metric. Set a cap so the buyer can live with the math. Set a period that matches the contract, not a hope decade. Set who keeps the customer relationship. Set information rights.
QoE will test the baseline GP. If the baseline is fiction, the earn-out is fiction.
Stanford’s 2024–25 search median — about $16 million, ~6.2x EBITDA, ~25% margin (Source: Stanford GSB) — is a buyer profile that still uses paper on the right files. It is not a reason to accept a vague metric.
How does the peg interact with paper?
A sloppy working-capital peg can take cash at true-up while you are already carrying a note. Write both. Do not let the buyer argue that earn-out GP should be computed after they change inventory methods.
Taxes on installment notes and earn-out character are CPA questions. Standby is not installment comfort. It is delayed cash.
BizBuySell’s 223-day 2025 manufacturing median (Source: BizBuySell) is long enough to negotiate paper in the LOI, not at the signing table.
What does an illustrative standby surprise look like?
Illustrative only.
Buyer needs a 10% injection on a project that fits the $5 million box. Seller agrees to a “note for half” and mentally schedules monthly interest. Lender requires full standby for the life of the 7(a). Seller’s retirement cash plan was the interest. The plan was wrong. Price the wait or refuse the exclusive.
A second file: $90,000 earn-out on two named accounts’ gross profit over 18 months, cap stated, GP definition matches the job-cost file, information rights quarterly. Ordinary. Collectible if the book holds.
What should the teaser say about paper?
“Seller may consider a note or earn-out for concentration or SBA structure” is enough. Do not advertise that you will finance anyone. Do not print a rate. Credit is a diligence fact.
The intro call with Jason Taken can include whether you can bear standby. Sell my manufacturing business is the pillar.
What security and information rights are worth insisting on?
On an amortizing note: a security interest that counsel actually perfects, a prohibition on stripping cash to affiliates, financials on a schedule, and a default path that does not require you to sue for the privilege of reading a P&L. On a standby note: all of that plus a clear statement that you will not be paid until the 7(a) permits it. Do not “informally” take interest on a note the lender thinks is silent.
On an earn-out: quarterly GP packs on the named accounts, the right to inspect invoices, a dispute mechanism, and a statement of who owns the customer relationship. If the buyer can move the work to another plant they already own, say whether that still counts. If they can load corporate overhead into GP, you have already lost.
Personal guarantees feel comforting and are often unavailable on SBA files. If you require one, say so before the first LOI. SBA buyers cannot invent a guaranty the SOP does not allow you to treat as equity.
When should you refuse paper even if the headline multiple looks pretty?
When the buyer’s capital is a slide. When the whale can leave and the earn-out is the entire premium. When standby would be your only retirement cash. When you do not trust the measurement system. When you need a December wire for a tax year and the paper pays in year four. Pretty multiples on uncollectible paper are brochure math.
A lower cash number from a capitalized party can beat a higher headline from a party who needs you to be the bank. IBBA’s majority-cash pattern across bands (Source: IBBA) is a reminder that paper is the exception you choose, not the default you owe.
Illustrative only: $1.3 million headline, $400k standby, $150k earn-out on one account. Seller is 71 and needs cash for a house. Refuse or re-cut until cash at close funds the house. The earn-out can stay small. The standby cannot be the house.
How do you talk about paper in the CIM without inviting every buyer to under-cash the bid?
State that structure will be discussed with qualified parties. Do not print that you “prefer to finance.” Do not print a coupon. Credit is earned in diligence. Tired owners advertise financing because they fear the file will not sell. That advertisement trains buyers to bid with your balance sheet.
How do you keep earn-out books from being moved to another plant?
If the buyer already operates a similar cell, they can shift hours and starve the metric. Write whether transferred hours still count, whether a plant shutdown counts as a default, and whether a customer move the buyer caused still pays. Those sentences are counsel’s. The commercial point is: do not assume the book stays on your old floor.
If you remain as a consultant, do not let the earn-out depend on your unpaid quoting. Either you are paid to quote or the metric cannot require you.
Illustrative only: named-account GP earn-out, buyer shifts the work to an existing plant in another state, GP on the old floor collapses, seller has no sentence about transferred hours. That is a free option the buyer bought. Write the sentence.
How should you underwrite the buyer if you are going to be their creditor?
Ask for the same capital evidence you would want if you were lending your retirement. Personal financial statement on an individual. Fund letters on a sponsor. A debt schedule after close. A prohibition on stripping cash. If they will not provide that, they are not a party you should finance.
Standby plus a thin buyer is a long wait with a bad credit. Cash from a stronger party can be the whole strategy.
What intercreditor facts sneak into a “simple” seller note?
If a bank is in first position, your note may be fully subordinated in ways that surprise you at default. Read the intercreditor. If you wanted a second lien on the cells, say so before the LOI. If the bank will not allow it, you are an unsecured retiree. That can still be rational. It should not be a surprise.
Standby plus silent second-lien hopes is how households get angry in year three.
Illustrative only: amortizing note, no intercreditor read, default in month 18, seller last in line. The cash number that looked “a little light” would have been the better sleep.
What happens if the buyer resells the company during the earn-out?
Write the acceleration or the assumption. Silence is how you work for a stranger’s second buyer. Counsel drafts it. The commercial point is: do not assume the original buyer stays.
A last paper habit: if you cannot explain the metric to your spouse in two sentences, it is too clever to collect. Named-account gross profit with a cap is two sentences. EBITDA after allocations is a career.
One more paper note: do not verbally agree to “cover a shortfall” if DSCR slips. That sentence is an unwritten guaranty. If you mean a defined earn-out, write the metric. If you do not mean it, do not say it in the management meeting.
If the buyer wants you to keep quoting for free during the earn-out, that is unpaid labor. Put hours and pay in the consulting agreement or refuse the metric that requires you.
Educational information only. Notes, security interests, and earn-out contracts are counsel documents. SOP language is the lender’s. No paper structure guarantees payment.