Seller financing means the seller lets you pay part of the price over time through a promissory note. An earnout means part of the price is paid later, and only if the business hits agreed targets after closing. Both bridge a gap between what you can pay now and what the seller wants. They also tie the seller's payout to a business you now run, so definitions and control matter. If you are using a Small Business Administration (SBA) 7(a) loan, the rules are stricter: seller earnouts are prohibited, and a seller note counts toward your equity only on full standby (no payments for the loan's full term). This primer is for buyers weighing these tools.
The short answer
- A seller note is debt you owe the seller. An earnout is a contingent payment based on performance. Rollover equity means the seller keeps a stake. A holdback or escrow keeps part of the price back to secure claims.
- In a Q2 2026 broker survey (IBBA), most of the price was paid in cash at closing in every size band, and seller financing was 6 to 11 percent. The survey measures share of price, not how many deals include a note.
- SBA 7(a) change of ownership loans prohibit seller earnouts, and seller debt counts toward your required equity only if it is subordinated and on full standby, meaning no payments for the full term of the loan.
- The disputes are usually about definitions and control: how earnings are measured, who runs the business, and what counts when a loss or a cost change hits the measurement period.
- Insurance connects in several places: loss payee rights, set-off against claims, the effect of an uninsured loss on payments, and how premiums and recoveries are treated in an earnout formula.
What do seller notes, earnouts, rollovers and holdbacks mean?
A deal price is rarely a single payment at closing. Here are four tools you will hear about and what each means for each side. Terms are negotiated, so treat the table as a map of ideas, not a menu of standard terms.
| Tool | What it is | Why sellers use it | Why buyers use it | Main risk |
|---|---|---|---|---|
| Seller note | You owe the seller part of the price, paid over time with interest | Can widen the pool of buyers who can afford the business and earns interest on the unpaid balance | Lowers the cash and outside financing you need at closing | Adds debt service, and the seller becomes a creditor of the business |
| Earnout | A deferred payment that depends on later results, such as revenue or earnings | Can bridge a price gap | Shares forecast risk: you pay more only if the results show up | Disputes over the metric and over control after closing |
| Rollover equity | The seller keeps a stake, for example 20 percent | Keeps upside and suits a seller who stays involved | Aligns the seller, reduces cash at closing | Shared ownership needs a shareholders' agreement and exit terms |
| Holdback or escrow | Part of the price is held back, or placed with a neutral escrow agent, to secure claims | Sellers may accept it as part of agreeing the indemnity terms, and then negotiate its size and release date | Gives you money to point to if a representation (a factual statement the seller made about the business) proves false | Disputes over claims and release dates |
One sell-side advisory firm says earnouts work best to bridge a price gap or keep the seller involved, and suggests replacing earnouts of five years or more with equity. That is one adviser's opinion, but it shows the trade-off: the more the seller's payout depends on a business you control, the more careful the contract must be. For the purchase agreement as a whole, see what a business purchase agreement covers.
How much of the price is paid over time, and how common are earnouts?
In the IBBA's Q2 2026 Market Pulse, seller financing was 6 to 11 percent of the price in every size band, and most of the price in every band was paid in cash at closing. The one-page chart does not say whether the figures are averages or medians.
| Purchase price band | Cash at close | Seller financing |
|---|---|---|
| Under $500,000 | 88% | 11% |
| $500,000 to $1 million | 92% | 6% |
| $1 million to $2 million | 91% | 7% |
| $2 million to $5 million | 84% | 9% |
| $5 million to $50 million | 83% | 6% |
The chart shows the share of price, not how many deals include a note or earnout, so it cannot tell you how often a seller note appears. The rows do not add to 100 percent. Part of the gap is rounding, and the rest is other consideration such as earnouts and retained equity, which the chart does not break out cleanly for every band.
The next figures count how many deals include an earnout, a different measure from the share of price above. The 2026 study by SRS Acquiom (SRS), a deal services firm, covered more than 2,300 private deals closed from 2020 to 2025. As summarized by the law firm Fasken, it reported earnouts in 24 percent of deals in 2025, with one to two years the most common length (38 percent). A 2025 American Bar Association study of deals from $25 million to $900 million found 18 percent. Both are weighted toward much larger deals and neither breaks out the smallest ones, so treat earnouts and rollover as tools you may meet, not standard features.
What terms matter in a seller note?
A seller note is a loan, and counsel usually papers it like one. The terms that decide how it behaves:
- Current pay or standby. Does the buyer pay on schedule, or are payments deferred? This matters most for an SBA loan, covered below.
- Security and subordination. A note is often backed by a security agreement that gives the seller a claim on business assets, and a senior lender may require the seller to agree that its note ranks behind the lender's loan. In an SBA deal, any seller security interest is subject to the lender's standby and subordination requirements, so ask the lender what lien position, if any, the seller may hold.
- Default and acceleration. What happens if you miss a payment, can the seller demand the whole balance, and does anyone, including you personally, sign a personal guaranty of the note? Ask counsel.
- Set-off. A right to reduce note payments by the amount of valid claims you have against the seller. With an SBA lender, ask whether set-off can be used against a standby note. The standby agreement generally limits what the seller can do without the lender's consent.
A hypothetical example. A buyer pays $2,400,000 for a business in a conventional (not SBA) deal and wants to keep more cash on hand. Three structures for the same headline price show what changes. The interest rate and term are illustrative.
| Structure | Cash at closing | Seller note | Earnout (maximum) | Illustrative monthly note payment |
|---|---|---|---|---|
| A: all cash | $2,400,000 | None | None | None |
| B: cash plus note | $2,000,000 | $400,000 | None | About $7,700 |
| C: cash, note and earnout | $1,800,000 | $300,000 | $300,000 | About $5,800 |
Each row adds up to the same $2,400,000 headline price, assuming the earnout is paid in full. The payments assume a 6 percent rate and equal monthly payments over five years. In B, the buyer keeps $400,000 more cash at closing than in A but takes on about $92,000 a year of note payments. In C, the buyer has less cash at risk but owes a note and may owe up to $300,000 more if the earnout targets are met, so the seller relies on the buyer to run the business well.
How do earnouts work, and how do they go wrong?
An earnout pays the seller more if the business hits a target after closing, measured by revenue, earnings or a non-financial milestone. In the larger-deal data above, one to two years was the most common length. Your agreement sets its own. Disputes tend to cluster around the same questions:
- The metric. Revenue is simpler to measure but can be gamed with discounts. Earnings are closer to value but depend on cost allocations. Ask counsel to write the accounting rules in.
- Control. You run the business after closing. Sellers often ask for operating covenants (promises about how you run it, such as not cutting prices), and buyers resist them.
- Costs and one-time items. Does the target count shared overhead, new hires, owner pay, insurance premiums, insurance recoveries or an uninsured loss? Ask counsel to settle that in writing before the first measurement period.
- Acceleration, set-off and disputes. What happens to unpaid earnout if you sell the business or the seller owes you an indemnity, and who decides if you disagree on the number?
Seller earnouts are prohibited in SBA 7(a) change of ownership loans, as the next section explains.
What changes if you use an SBA loan?
The SBA's lender rulebook for 7(a) loans, Standard Operating Procedure (SOP) 50 10 8.1 (effective October 1, 2026), Appendix 15, limits these tools for change of ownership deals. Your lender applies the rules and can be stricter, so confirm every point with them. With an SBA loan a seller note takes one of two paths: on full standby it can count toward your equity. If it is not on full standby (paid currently or only partly deferred) it counts as debt your cash flow must support.
| Tool | What the SBA rulebook says |
|---|---|
| Seller earnout | Not allowed. Buyer rebates based on business performance are allowed, and the proceeds must pay down the loan that funded the change of ownership. |
| Seller note on full standby | Can count toward your equity. Full standby means no principal or interest payments for the full term of the 7(a) loan. The note must also be subordinated (it ranks behind the SBA lender) and documented as the SBA requires. |
| Seller note not on full standby | Counts as debt. Total debt that can support the deal is limited to the business valuation amount and must be supported by debt service coverage. |
| Seller rollover equity | Generally not available in an Initial Acquisition or Business Expansion, because the seller may not stay on as a stockholder. Partial buyouts differ. |
| Seller staying on | Generally not as an officer, director or employee. A consulting contract of up to 24 months in total is allowed. Partial buyouts differ. See the seller stays on as a consultant. |
For the equity rules in full, including how much seller debt can count, see how SBA 7(a) acquisition loans work and how much cash you need to buy a business. For what your lender will want you to carry, see SBA lender insurance requirements.
Where does insurance touch seller financing and earnouts?
Insurance enters the picture in four places. The first is the one that hits cash flow most directly.
- An uninsured loss. A fire, a lawsuit or a cyber event that insurance does not pay comes out of the same cash that pays your lender, your seller note and any earnout, and may reduce the earnings an earnout measures. See seller notes, earnouts and a big uninsured loss.
- Loss payee rights. A seller whose note is secured by business assets may ask to be named on the property policy as a loss payee (a party paid, in an agreed order, if insured property is damaged). A plain loss payee clause generally gives no greater rights than the insured has, while a lender's loss payable clause can protect a creditor more strongly. Priority between your senior lender and the seller comes from the loan and subordination documents, and an SBA lender's insurance requirements control. Ask your broker and lender how each interest will be shown.
- Indemnity and set-off. The seller's promise to cover claims is only as good as the money behind it. See seller indemnities vs insurance.
- The earnout formula. If the target is earnings, say how premiums, insurance recoveries and uninsured losses count. A one-time recovery can inflate a measurement period, and a business income recovery that replaces earnings lost during a covered shutdown needs its own rule. A higher premium after you right-size coverage can lower the measured number. See insurance in your quality of earnings review.
Morrow can review the seller's policies and your lender's requirements and request quotes before you commit to payment terms. A quote is not bound coverage.
What should you ask deal counsel, your lender, your accountant and your broker?
Before you sign, take four questions away. Ask counsel how the note, any security and any set-off are documented, and how the earnout is measured and who controls the business. Ask your lender which of these tools your loan allows and whether the note must be on full standby. Ask your accountant how the note and any contingent payment hit your books and taxes. Ask your broker which loss payee interests this structure creates.
Morrow is an insurance agency, not a law firm, accounting firm or lender. For the legal and tax effects, ask your advisors. To keep working through the deal, see working capital and the peg.
Keep reading
- Seller Notes, Earnouts and a Big Uninsured Loss in Year One
- Seller Indemnities vs Insurance: What They Are Really Worth
- How SBA 7(a) Loans Work When You Buy a Business
- What a Business Purchase Agreement Covers
- How Much Cash Do You Need to Buy a Business?
- All guides for new business owners
Frequently asked questions
What is seller financing when buying a business?
It is when the seller accepts part of the price over time through a promissory note instead of cash at closing. You owe the seller principal and interest on agreed terms, and the note is often secured and ranks behind a senior lender.
What is an earnout?
An earnout is a deferred part of the price that is paid only if the business reaches agreed targets after closing, such as revenue or earnings. It can bridge a price gap, but it creates disputes over how the target is measured and who controls the business.
Can I use an earnout with an SBA loan?
Not for a seller earnout. SBA 7(a) change of ownership loans prohibit seller earnouts, although buyer rebates based on business performance are allowed, with proceeds used to pay down the loan. Ask your lender how it applies the rule to your deal.
Does a seller note count toward my down payment in an SBA deal?
Only if it is subordinated and on full standby, meaning no payments for the full term of the 7(a) loan, and documented as the SBA requires. Even then, standby debt and similar limited sources together may provide no more than half of the required equity. Confirm with your lender.
What happens to my seller note if there is a large uninsured loss?
The loss is paid from the same cash that services your loans, so it can strain payments and covenants. Whether the seller must accept deferral depends on the note and any subordination agreement. Ask deal counsel before you need the answer.
Is a seller note better than an earnout for me as the buyer?
They solve different problems. A note is debt you owe regardless of results. An earnout only pays if the business hits targets, but it invites disputes over measurement and control. Which fits depends on your cash flow, your lender's rules and how much you trust the forecast, so walk through both with deal counsel and your lender.
References
- IBBA and M&A Source: Market Pulse Q2 2026 Highlights (posted August 2026)
- Fasken: Private M&A Deal Trends To Watch, Key Takeaways From SRS Acquiom's 2026 Study (May 12, 2026)
- K&L Gates: 2025 ABA Private Target Mergers & Acquisitions Deal Points Study (December 19, 2025)
- U.S. Small Business Administration: SOP 50 10 8.1, Appendix 15, change of ownership (effective October 1, 2026)
- Morgan & Westfield: Acquired, Ch. 20, Financial Components (sell-side advisory firm, 2026)
Just bought a business? Get your insurance reviewed.
Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.
Morrow · 25 New Chardon Street, 4th Floor, Boston, MA 02114
This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.