Seller Notes, Earnouts and Rollover Equity: How Deal Structure Decides What You Take Home
Two offers arrive for your business. One is $2.4 million. The other is $2.1 million. The first one is not necessarily better.
In small business acquisitions, how the price is paid matters as much as the price. Cash at closing, a seller note, an earnout, rollover equity and a consulting agreement each carry different risk, different timing and different tax treatment. Here is how each works, what to negotiate, and how to compare offers on equal footing.
Cash at closing
The simplest piece. It is what the buyer's lender and equity investors fund on the closing date, minus your debts paid off, transaction costs, and any escrow or holdback.
Negotiate: the size of any escrow or holdback for indemnification claims, how long it is held, and what claims it covers.
Seller notes
A seller note means you lend part of the purchase price to the buyer, to be repaid over time with interest.
Why buyers ask for one: it bridges the gap between what a lender will fund and the price, and it signals that you believe the business will keep performing.
What changed in 2026: for SBA-financed acquisitions, a seller note only counts toward the buyer's required equity if it is subordinated and on full standby, meaning no principal or interest payments for the entire term of the SBA loan, which is often ten years. Interest can accrue and be paid after the SBA loan is repaid. Seller notes, other standby debt and small minority investors together can cover no more than half of the required 10% injection. A note outside the injection is still allowed, but it counts as debt the business must support. See the October 2026 SBA changes.
Negotiate: - Interest rate, and whether interest accrues during any standby period. - Amortization schedule and maturity. - Security: a lien on business assets, usually behind the senior lender, and a personal guarantee from the buyer where possible. - Default terms: what happens if payments stop, and what you can do about it given the senior lender's subordination agreement. - Reporting: monthly or quarterly financial statements while your note is outstanding.
Value it honestly: a $300,000 note on full standby for ten years is not worth $300,000 today. It is worth less, by an amount that depends on the interest rate, the time and the risk that it is not repaid.
Earnouts
An earnout ties part of the price to the business's performance after closing, such as revenue or gross profit over the next one to three years.
Why buyers ask for one: to bridge a disagreement about the future. You believe last year's growth will continue. The buyer wants proof.
Watch-outs: earnouts are where post-closing disputes start. Once the buyer controls the business, they control pricing, staffing and spending, all of which affect the earnout metric. SBA lenders generally do not allow earnouts in SBA-financed deals, so earnouts show up more often with sponsors, strategic buyers and private equity.
Negotiate: - The metric. Revenue is harder to manipulate than EBITDA. Gross profit is a middle ground. - Definitions. Exactly how the metric is calculated, with an example using last year's numbers attached to the agreement. - Measurement periods and when payment is due. - Operating covenants: what the buyer must and must not do that would affect the metric. - Acceleration: if the buyer sells the business or merges it into another before the earnout ends, what happens. - Access to records and a dispute process.
Rollover equity
Rollover equity means you keep a minority stake in the business (or in the buyer's holding company) instead of taking all cash.
Why it can be attractive: if the new owner grows the business with more capital and support, your remaining stake can be worth more later than it is today. In some structures, rolled equity may receive tax deferral. Our earlier article, Rolling Equity 101, explains the mechanics.
Negotiate: - What you own: the class of equity and its rights versus the buyer's. - Governance: a board seat or observer rights, information rights and approval rights on major decisions. - Dilution: what happens when new capital comes in. - Exit: tag-along rights if the majority owner sells, drag-along terms, and any put right after a set period. - Valuation at exit: how your stake is valued if you leave before a sale.
Consulting and employment agreements
Most buyers want the seller to stay for a transition period. Payment for that work is compensation for services, not purchase price, and is taxed as ordinary income. SBA rules limit how long a seller can remain in a consulting role after an SBA-financed sale; check the current limit with the buyer's lender.
Negotiate: hours, duration, responsibilities, reporting line, pay and what happens if the buyer ends it early.
The working capital peg
Most deals assume the business is delivered with a normal level of working capital, usually receivables plus inventory minus payables, called the peg. If actual working capital at closing is below the peg, the price goes down dollar for dollar. If it is above, the price goes up.
Negotiate: how the peg is calculated (an average of the last 12 months is common), seasonality, and a clear true-up process. Seasonal businesses, such as specialty food makers ahead of the holidays, need special care.
Comparing two offers
Back to our two offers. Suppose:
| Offer A | Offer B | |
|---|---|---|
| Headline price | $2.4M | $2.1M |
| Cash at closing | $1.5M | $1.85M |
| Seller note | $300K, full standby, 10 years | $250K, paid over 5 years |
| Earnout | $600K over 3 years, EBITDA-based | None |
| Rollover equity | None | None |
Offer A only reaches $2.4 million if the earnout is fully paid and the standby note is repaid in ten years. Offer B puts more cash in your hands now, and its note is repaid sooner. Depending on your confidence in the earnout and how you value time, Offer B may be worth more. Illustrative figures only.
The lesson: always compare offers on cash at closing, the timing and risk of every other dollar, taxes, and what happens to your people.
How Twelve31 structures purchases
Twelve31 structures each purchase around the owner. In many cases that includes a share of the upside, so the person who built the company benefits from what comes next. See what we look for. Buyers can get structuring help from Twelve31 Advisors, which advises on SBA 7(a) financing, seller notes, earnouts, rollover equity, working capital pegs and asset versus stock purchases.
If you are weighing offers or expect to soon, tell us about your business. It is confidential, with no obligation.
General information only, not legal or tax advice. Structure, tax treatment and SBA eligibility depend on the specific deal.
