Question 1

What are the three main deal structures in business sales?

Accepted Answer

All-cash: buyer pays 100% of the purchase price at closing. You receive everything upfront, no ongoing risk. Seller note: buyer pays 70–85% at close, you finance 15–30% as a promissory note paid over 3–7 years with interest. Earnout: a portion of the price (10–30%) is contingent on future business performance, paid over 1–3 years.

Question 2

Which deal structure is best for a seller?

Accepted Answer

All-cash is best for sellers because you receive 100% at closing with zero ongoing risk. Seller notes are second — you earn interest on the deferred amount but take on buyer default risk. Earnouts are riskiest — you only collect if the buyer operates the business to hit future targets, which you no longer control.

Question 3

Why do buyers want seller notes?

Accepted Answer

Seller notes reduce the cash required at closing, allowing buyers to acquire businesses they couldn't otherwise afford. They also align seller incentives during transition — if you're holding a note, you're motivated to help the buyer succeed. Sellers who carry notes often get higher headline prices in exchange for the deferred payment.

Question 4

Is a seller note safe?

Accepted Answer

Seller notes carry risk. If the buyer runs the business poorly and it declines, they may not be able to make note payments. You can mitigate risk with: a security interest in the business assets (collateral), a personal guarantee from the buyer, a life insurance policy on the buyer naming you as beneficiary, and cross-default provisions.

Question 5

What interest rate should I charge on a seller note?

Accepted Answer

Market rates for seller notes range from 6–9% currently, depending on risk. Minimum rates are set by the IRS (Applicable Federal Rate). Going below the AFR creates tax complications. A typical seller note: 6–7% interest, 5-year amortization with a potential balloon payment, monthly payments.

Question 6

What is an earnout and when is it appropriate?

Accepted Answer

An earnout ties a portion of your sale price to future performance metrics (revenue, EBITDA, customer count). Earnouts are appropriate when there's a valuation gap — you believe the business is worth more than the buyer's current offer. They're most common in PE deals and deals with uncertain near-term performance. Earnouts are high-risk for sellers because the buyer controls operations after closing.

Question 7

How do I protect myself in an earnout?

Accepted Answer

Earnout protections: clearly defined and verifiable metrics (revenue > EBITDA, which buyers can manipulate); buyer covenant to operate business in normal course; prohibition on extraordinary expenses during earnout period; audit rights to verify the numbers; acceleration on change of control; and a cap on expenses that count against earnout calculations.

Question 8

What happens to my business debt at closing?

Accepted Answer

In an asset sale, business debt is typically paid off at closing from sale proceeds. The 'net proceeds' calculation: Sale Price − Broker Fee − Debt Payoff − Taxes = Net Cash to Seller. Equipment loans, lines of credit, and SBA loans on the business are all paid at closing unless the buyer specifically assumes the debt.

Question 9

What is a working capital adjustment?

Accepted Answer

Working capital (current assets minus current liabilities) is required to run the business day-to-day. Most deals include a working capital target — if working capital at closing exceeds the target, the buyer pays more; if below, the seller gets less. Home service businesses typically have a working capital target of 1–2 months of operating expenses. Know your working capital position before closing.

Question 10

How does SBA financing affect deal structure?

Accepted Answer

SBA 7(a) loans limit seller notes: the seller note must typically be on full standby for the first 24 months (no payments) unless structured as equity. This means if you want cash flow from a seller note immediately, SBA financing may not be compatible. SBA also has specific requirements around earnouts. Work with an SBA-experienced attorney to navigate these rules.

Question 11

What is an LOI and what does it lock in?

Accepted Answer

A Letter of Intent (LOI) is a non-binding agreement that establishes the key deal terms: price, structure, exclusivity period, and timeline. LOIs are typically non-binding except for the exclusivity clause (you can't talk to other buyers for 30–60 days). Price and structure can still change during diligence — but material changes give both parties the right to walk. Protect yourself with an earnest money deposit.

Question 12

What is earnest money and how much should I require?

Accepted Answer

Earnest money (good faith deposit) is paid by the buyer at LOI signing, typically 2–5% of the purchase price. It's refundable if the seller terminates, but non-refundable if the buyer walks without cause. For a $1.5M deal, $30K–$75K is typical earnest money. This filters out non-serious buyers and compensates you for the exclusivity period if the buyer backs out.

Deal Structure: 12 Questions Answered

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