Financing a startup acquisition: SBA, seller notes, earn-outs

Most buyers pay for a startup with a mix of their own cash, a loan, and terms the seller agrees to carry. The three tools you will hear about most are SBA 7(a) loans, seller financing and earn-outs. Each shifts risk in a different direction, and the right blend depends on the business, your credit and how much the seller trusts the future.

This is general education, not financial, tax or legal advice. Rules change often, so check current terms with a lender and an attorney.

The basic building blocks

A typical acquisition budget has four pieces.

1. Your cash. The down payment, which lenders usually require.
2. Bank or SBA debt. A loan repaid over years.
3. Seller financing. The seller lets you pay part of the price over time.
4. Contingent payments. An earn-out that depends on future performance.

You do not need all four. Many small deals use only cash, or cash plus seller financing.

SBA 7(a) loans

The U.S. Small Business Administration guarantees part of loans made by participating lenders. The SBA's 7(a) page states the maximum loan amount is $5 million and lists changes of ownership, complete or partial, as an eligible use. So buying a business is a standard purpose for this loan.

What lenders look at

The detailed rules come from the SBA's standard operating procedure. Law firm Starfield and Smith's 2026 summary of SOP 50 10 8.1 reports the following for change-of-ownership deals:

• Equity injection. For an initial acquisition, 10 percent of total project costs, which the article says cannot be reduced or eliminated.
• Limits on borrowed equity. Standby debt, seller debt and minority investor equity may not exceed half of the required injection. On a $1,000,000 project with a 10 percent requirement, that is $50,000.
• Debt service coverage. The business must show a ratio of 1.25 to 1 for initial acquisitions, using historical or adjusted historical earnings, not projections.
• Valuation. A business valuation is now required for change-of-ownership transactions.
• Quality of earnings report. Required for initial acquisitions when the purchase price, excluding owner-occupied real estate, is $3 million or more.
• Loan term. Up to 10 years for change-of-ownership deals.
• Seller consulting. Up to 24 months.

Because those rules were updated recently, confirm which version applies to your application date with your lender. The article describes the new SOP as applying to applications from October 1, 2026.

Fit for software and AI startups

SBA lenders look at cash flow history. A software product with two or more years of clean, documented profit may qualify. A young AI tool with a short history, volatile revenue or thin assets may be harder to finance, and some lenders are less comfortable with businesses that have few hard assets. Ask lenders directly whether they finance digital businesses.

Pros and cons

Pros	Cons
Long repayment terms ease monthly cash flow	Paperwork and a slower timeline
Allows buyers with less cash	Requires equity injection and often personal guarantees
Government guarantee encourages lenders to say yes	Needs documented, historical earnings

Personal guarantees are common on small business loans, which means your own assets can be at risk. Ask your lender exactly what you would be guaranteeing.

Seller financing

In seller financing, the seller accepts part of the price in installments. You sign a promissory note, repay it with interest and the seller keeps a claim on what you owe.

Why sellers agree

It can help the deal close at a higher headline price, and it shows the seller believes in the business. For the buyer, it reduces the cash needed upfront and aligns the seller with a smooth handover.

Terms to negotiate

Starfield and Smith's guide to seller notes highlights points that matter when an SBA loan is involved:

• The note should be clear about its start date, and a standby period runs from closing.
• The borrower should be the debtor and the payee should be the seller.
• If payments are barred during a standby period, no payments of any kind should be allowed, including prepayment.
• The note should be subordinated to the lender's loan.
• Profit participation provisions that let the seller collect more than the debt, such as an earn-out tied to a later sale, should be removed.

That article was written in 2017, so confirm current standby requirements with your lender. Under the 2026 rules above, seller debt counts toward the equity injection only within the capped share and typically on standby.

Other terms to think about

• Interest rate and term. Balance fairness with your cash flow.
• Security. Will the seller have a lien on assets?
• Offset rights. Can you reduce payments if the seller breached a warranty? Ask your lawyer to draft this carefully.
• Default terms. What happens if you miss a payment?

Earn-outs

An earn-out ties part of the price to future results, such as revenue or retention after closing. Instead of paying everything upfront, you pay extra only if the business hits agreed targets.

When earn-outs help

• You and the seller disagree on price because of uncertain growth.
• A big customer might leave, and the seller believes they will stay.
• The seller will stay involved and has influence over results.

FE International's valuation guide gives an example where a 19 percent customer's renewal was tied to an earn-out. That is the type of risk-sharing earn-outs are good for.

What can go wrong

• Fights over definitions. Revenue, profit, churn and costs must be defined exactly.
• Control disputes. If you change pricing or product direction, the seller may claim you hurt their earn-out. Say what you can and cannot change.
• Cash strain. A big earn-out payment due after a great year can still strain cash.
• Interaction with lenders. An SBA lender may restrict contingent payments, so ask before you propose one.

Write the earn-out as a short, measurable formula, with reporting rights, a calculation date and a dispute process.

Other ways to finance

• Marketplace financing partners. Acquire.com says it offers help with acquisition financing, and Flippa lists acquisition financing among its services. Terms vary and are set by partners, so compare offers.
• Investor partners. A passive investor or partner can fund part of the purchase in return for equity or a revenue share. Note that SBA rules treat passive minority investor equity as a limited source.
• Home equity or personal savings. These are risky, so avoid using money you cannot afford to lose.
• Cash flow from the business itself. In micro-acquisitions, small deals sometimes fund the last payment from profits.

A sample structure for a $300,000 deal

This is an illustration with made-up numbers, not a recommendation.

Source	Amount	Role
Buyer cash	$60,000	Down payment
Senior loan	$180,000	Repaid over several years
Seller note	$30,000	Paid after a standby period
Earn-out	$30,000	Paid if retention targets are met

The structure shifts about 20 percent of the risk to the seller. Your lender and lawyer should check every piece.

How to choose

1. Start with the cash flow. What monthly payment can the business support with margin to spare?
2. Check the risk. If churn or concentration worries you, favor seller financing and earn-outs.
3. Speak to lenders early. Their rules shape the structure.
4. Use the numbers. Compare the price with valuation multiples before you stretch.
5. Plan for the early months. See the first 90 days after buying a startup.

To find deals where revenue is verified at the payment provider, which lenders and sellers both appreciate, start at the Buy a startup marketplace.

FAQ

Can I buy a startup with an SBA loan?

Yes, change of ownership is an eligible use of 7(a) loans according to the SBA. Lenders will still require equity, solid historical earnings and often a valuation, and they decide whether a digital business fits their appetite.

How much cash do I need as a buyer?

For SBA deals, the reported minimum equity injection for an initial acquisition is 10 percent of total project costs. Other financing routes vary, so ask each lender and seller.

What is the difference between seller financing and an earn-out?

Seller financing is a fixed amount you owe over time. An earn-out is a variable amount you owe only if the business performs as agreed.

Are earn-outs good for buyers?

They can be, because they reduce upfront risk. They work best with clear formulas and limited disputes, and they should be checked against any lender restrictions.