Seller Financing 101: Bridging the Gap Between Purchase Price and Equity Requirements

One of the most common challenges in small business acquisitions is how to cover the full purchase price—especially when buyer equity and lender financing don’t quite close the gap.

Seller financing is one of the most powerful tools for making deals work. It helps bridge the space between what the seller wants, what the buyer can contribute, and what lenders are willing to finance—while aligning long-term interests between both parties.

Whether you’re buying your first business or your fifth, understanding how seller carryback financing works can make the difference between a stalled deal and a successful close.

Understanding the Purchase Price Gap

In nearly every acquisition, there’s a difference—sometimes subtle, sometimes large—between what the seller hopes to receive and what the buyer is able or willing to offer up front. These gaps in purchase price typically emerge from:

• Differences in valuation approach: Sellers often price based on future earnings potential or emotional value; buyers focus on historical cash flow, adjusted EBITDA, and what a lender will underwrite.
  
• Working capital assumptions: Sellers might intend to walk away with all the cash and accounts receivable in the business. Buyers, on the other hand, assume that sufficient working capital will remain to operate the business day one. This misunderstanding can easily result in a six-figure gap.
  

For example, a seller prices a company at $1.2M but plans to retain $200K in cash and AR. The buyer expects that $200K to remain to cover payroll, inventory, and vendor payments. This unspoken difference turns into a pricing and funding mismatch that must be reconciled.

• Tax motivations: Sellers may want to structure the deal in a way that defers tax liability—like maximizing goodwill or holding a portion of the payment over time. Meanwhile, the buyer may be focused on minimizing out-of-pocket costs and maximizing depreciable asset value.
  

A seller nearing retirement may push for a higher sale price with more allocated to goodwill to secure long-term capital gains treatment, while the buyer is constrained by an SBA loan cap and prefers a lower upfront valuation. These differences become negotiating points—and possible sticking points—unless addressed creatively.

Seller financing offers a bridge between these competing priorities. It allows the deal to move forward without forcing either party to compromise too far, too fast.

The Equity Requirement: What Buyers Must Bring

In most SBA-financed deals, lenders require the buyer to inject 10–20% of the total project cost as equity. This ensures the buyer has “skin in the game” and demonstrates financial commitment.

But buyers don’t always have enough liquidity to meet this requirement comfortably—especially after accounting for working capital needs, deal costs, or planned post-close investments.

This is where seller financing can play a critical role. In certain structures, a seller note can even help satisfy a portion of the equity requirement when paired with buyer equity (subject to SBA guidelines).

How Seller Financing Works in Business Acquisitions

Seller financing—also called a seller carryback or a seller note—is when the seller agrees to receive a portion of the purchase price over time, rather than all at once at closing.

Key Characteristics of a Seller Note:

• Principal: The portion of the purchase price being deferred (e.g., $100K on a $1M transaction)
  
• Interest Rate: Commonly 6–10%
• Term: Usually 3–7 years
• Payments: Monthly or quarterly, sometimes with an interest-only period
• Subordination: Required in SBA deals—seller note payments must be subordinated to the SBA loan and may be deferred for up to 2 years

Put simply, the seller becomes a lender—and their repayment is typically second in priority to the bank.

Keep it under two pages, even for complex businesses.

Benefits of Seller Carryback Financing

Seller financing isn’t just a buyer tool—it creates alignment and benefits on both sides of the transaction.

For Buyers:

• Reduces upfront equity burden
  
• Increases SBA loan approval odds
  
• Creates goodwill and trust with the seller
  
• Provides more flexible repayment terms
  

For Sellers:

• Helps close the deal at a better price
  
• May reduce tax liability via installment payments
  
• Keeps a financial interest in the business’s future
  
• Provides income during the transition or retirement phase
  

When a seller agrees to carry back a note, it signals belief in the business—and in you as the new owner. It also shows lenders that the transition is collaborative and well-structured.

Common Seller Note Structures for Small Businesses

There’s no one-size-fits-all approach to seller notes. They can—and should—be tailored to the cash flow profile of the business and the structure of the deal.

Pro Tip: In SBA deals, be sure seller notes are properly subordinated and compliant. An incorrectly structured seller note can disqualify your financing or trigger lender delays.

Final Thoughts: Crafting the Win-Win

Seller financing is more than a funding gap solution—it’s a collaborative tool that helps buyers close deals, helps sellers unlock value, and gives lenders additional confidence in the transaction.

It can reconcile differences in valuation, address equity limitations, and smooth over tricky tax and timing issues—all while keeping everyone moving toward a shared outcome.

If you’re working on a deal and trying to close the last mile between financing and feasibility, it helps to work with people who understand how to bring creativity and compliance together.

Bridge Financial helps buyers structure seller-financed deals that are SBA-aligned, seller-friendly, and built to last—supporting every step from pre-offer to post-close planning.

Have a deal that needs thoughtful structuring? We’d love to help you bridge the gap.