Structuring Seller Notes and Investor Equity in 2026

Are You Ready to Close the SBA 7(a) Equity Gap?

Understanding how to structure capital is crucial when buying a business or property, especially when leveraging the SBA 7(a) loan program. A common challenge many independent sponsors face is the equity gap between the financing available and the capital needed for closing. With effective use of seller notes and investor equity, you can create a balanced capital stack that strengthens your acquisition potential.

The SBA 7(a) Loan Program and Its Limits

The SBA 7(a) loan program facilitates business acquisitions with loans up to $5 million. However, these loans typically cover only up to 90% of the total purchase price, leading to a potential equity gap that needs to be addressed. It means that you, as an entrepreneur, will need to bridge the difference with additional funding sources.

Many buyers turn to seller notes and investor equity as viable solutions. Seller notes allow the previous owner to take back a portion of the loan, while investor equity provides the necessary capital from outside investors.

Understanding Seller Notes

A seller note is a loan issued by the seller to the buyer as part of the transaction. Typically, the seller carries the note for a specified term, with interest ranging from 5% to 10%. This structure serves multiple purposes:

• Reduces the buyer's cash requirement: By offering financing, sellers can encourage buyers toward completing the acquisition.
• Aligns interests: Sellers may feel more secure when they have skin in the game, which ensures both parties work towards success.
• Improves deal structure: Seller financing can enhance your chances of obtaining traditional financing by increasing the capital available.

Utilizing Investor Equity

Securing investor equity is another strategy to fill the capital gap. Depending on your business model and size of acquisition, attracting the right investors can provide essential funds. Typically, investor equity makes up around 10% to 20% of the total funding. Here are key steps to find and secure investors:

• Pitching your acquisition: Tailor your pitch to highlight the potential of the business you're acquiring, its revenue generation, and how you plan to increase profitability.
• Structuring equity deals: Clearly outline how investor equity will be structured, including their ownership percentage and expected returns.
• Leveraging platforms: Use platforms like Raises.com that connect independent sponsors with potential investors who are interested in funding acquisitions.

Structuring the Capital Stack

Your capital stack should present a balanced approach to financing your acquisition. Typically, it involves three elements: debt (like SBA loans), seller notes, and investor equity. Here’s how to structure it effectively:

• First level - Senior Debt: This is your primary loan from an institution (e.g., SBA 7(a)). Examples suggest you need to align around 70% of the capital stack with this debt.
• Second level - Seller Notes: Account for an additional 10% to 15% with seller notes that help bridge the gap.
• Third level - Investor Equity: Secure the remaining 15% to 20% from investors, who want strong returns based on the realistic performance of the business.

Example of a Successful Capital Stack

Consider an independent sponsor looking to acquire a business valued at $1 million. Using the typical structure, here’s how the funding could break down:

• SBA Loan: $700,000 (70%)
• Seller Note: $150,000 (15%)
• Investor Equity: $150,000 (15%)

This traditional structure allows for a feasible pathway to acquiring the business while providing confidence to lenders and investors.

FAQs

What is a seller note, and how does it work?

A seller note is a loan from the seller to the buyer as part of a business or property sale. It offers financing, enabling buyers to complete a deal without needing to secure the entire cash amount upfront.

How do I find investors for my acquisition?

Attracting investors can be achieved through networking, pitching your acquisition, and leveraging capital-raising platforms such as Raises.com to connect with potential investors.

What are the benefits of using investor equity?

Investing equity can improve deal structure, diversify funding sources, and strengthen your overall capital stack, thereby increasing your chances of funding and successful acquisition.

What are common interest rates for seller notes?

Interest rates on seller notes typically range from 5% to 10%, depending on the agreement made between the buyer and seller.

Take Your Acquisition to the Next Level

Structuring a fund or SPV is essential for ensuring your capital raise is legally and financially sound. At Raises.com, we provide services for setting up your PPM, subscription agreements, and CFA proformas to optimize your capital structure. Let’s put together a winning strategy for your acquisition. Learn more about our services or book a consultation today!