Seller Financing vs. All Cash: What Every Owner Should Know Before Accepting an Offer
You got an LOI. The headline number looks great. But the terms buried in the deal structure are what determine how much you actually take home.
What "All Cash at Close" Actually Means
An owner gets an offer marked "all cash." They think: wire transfer, handshake, done. Reality: almost every deal over $1M has at least one of these three carve-outs that keep part of your money from hitting your account on day one.
Escrow holdback (10-15% for 12-18 months)
Money held back to cover any representations and warranties that turn out to be wrong. Released in phases if nothing pops up.
Working capital true-up
The peg. Calculated 60 to 90 days after close. Can swing tens or hundreds of thousands in either direction.
Indemnification basket
The first dollars of any claim come out of escrow before you see the rest.
A genuinely "all cash" offer at $3M usually means: $2.55M wired at close, $300K in escrow for 18 months, $150K working capital buffer. The headline number is the same. The timing is not.
Seller Notes: The Most Common Form of Seller Financing
A seller note is money the buyer owes you, paid over time with interest. In a typical lower-middle market deal, expect:
10-30%
Of Purchase Price
5-7%
Interest Rate
3-7 Yrs
Typical Term
2nd Lien
Behind Bank Debt
Why would you agree to this? Because deals with seller notes often get 10 to 20 percent higher headline prices than all-cash deals. The note is the seller's vote of confidence in the business, and buyers pay for it.
Red flag: any seller note over 30 percent of the deal, or any seller note where the buyer has no skin in the game. You are functionally financing the sale of your own business.
Earnouts: Proceed with Caution
An earnout is additional payment you earn if the business hits specified targets after close. Buyers love earnouts because they push risk onto the seller. Sellers should treat them as pressure-tested carefully.
- Base on revenue, not profit, Buyers can manipulate profit through allocations, expense pushdowns, and accounting changes. Revenue is harder to game.
- Cap the duration at 12-24 months, Longer earnouts invite disputes. Keep it short.
- Require audit rights, You should be able to inspect the books that determine your payout.
- Define the metric precisely, Write it like a contract, because it is one. "Revenue" should specify recognized vs. booked, gross vs. net of returns, etc.
- Keep it under 20-30% of total, More than that and you are taking equity risk without equity upside.
Rule of thumb: assume 50 percent of any earnout. If the deal does not work with 50 percent of the earnout counted, it does not work.
SBA 7(a) Deals and the 10% Seller Note Requirement
If your buyer is using an SBA 7(a) loan, expect a seller note as part of the structure. The SBA requires the buyer to have 10 percent equity in the deal, and that 10 percent can include a seller note on "full standby", meaning no principal or interest payments for the first 24 months.
SBA deals have upside: buyers can bring more leverage, which means they can often pay more. But you need to know what you are signing up for:
- At least 10% of the price as a seller note, typically on 24-month full standby
- The seller note usually sits behind the SBA loan in payment priority
- SBA underwriting can take 60-90 days, which extends closing
- Buyer must personally guarantee the loan
- You may be asked to stay on for 30-90 days as a paid consultant
Three Real $3M Deal Structures Compared
Same $3M headline price. Three very different deals for the seller.
Deal A: All Cash
Deal B: SBA + Note
Deal C: Heavy Earnout
Same $3M headline. Deal A gives you 85 percent on day one with nothing at risk beyond escrow. Deal C gives you 60 percent on day one with a third of the price at performance risk.
Escrow Holdbacks and Working Capital Pegs
These two items get less attention than seller notes and earnouts, and they wreck more deals.
Escrow Holdback
Typically 10 to 15 percent of the purchase price, held for 12 to 18 months. It secures your reps and warranties, the promises you made about the business in the purchase agreement. If something you swore was true turns out to be false, the buyer draws on the escrow before coming after you personally.
Working Capital Peg
A target level of current assets minus current liabilities that you need to deliver at close. The buyer looks at your trailing 12 months, averages the working capital, and sets that as the peg. Deliver less, they deduct from the price. Deliver more, they pay you the excess.
The fights happen in the definition. "Cash included or excluded?" "Is deferred revenue a liability?" "Which months count?" Get the definition in writing before the LOI, not after.
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When Each Structure Makes Sense
- All cash is right when, You want certainty, you are retiring, the business has a stable customer base, and you have multiple buyers competing.
- A seller note is right when, The buyer is strong but wants a confidence signal, the interest rate is better than you'd earn elsewhere, and the business has predictable cash flow to service it.
- An earnout is right when, Revenue is growing fast and the buyer can't underwrite the forecast, or the business has customer concentration that needs to be de-risked over time.
- Walk away when, More than 40 percent of the price is at performance risk, the buyer has no equity in the deal, or the note is unsecured and unsubordinated.
Red Flags in Any LOI
- Earnout over 40% of total consideration
- Seller note over 30% of purchase price
- No proof of funds from the buyer
- Working capital peg undefined or "to be determined"
- Escrow longer than 24 months
- Exclusivity period longer than 90 days with no milestones
- Expense reimbursement language favoring the buyer
- Ability to adjust price for "diligence findings" with no cap
Industry-specific deal structures vary too, for example, SaaS deals often include deferred revenue adjustments, while service business deals often have working capital peg fights over receivables. See our SaaS valuation guide and our service trades valuation guide for category-specific details.
Frequently Asked Questions
What does "all cash at close" actually mean?
It rarely means what it sounds like. Even in "all cash" deals, 10 to 15 percent of the purchase price is usually held in escrow for 12 to 18 months to back up your representations and warranties, and there is almost always a working capital adjustment that can move money either direction after close. A true 100-percent-wired-at-close deal with zero holdback and no working capital peg is rare above the $1M purchase price mark.
Is seller financing bad for the seller?
Not inherently. A seller note in the 10 to 30 percent range at 5 to 7 percent interest over 3 to 7 years is completely normal and often gets you a higher overall price than an all-cash deal. The risk rises when the note is a larger percentage of the deal, when it is unsecured, or when the buyer has no other capital in the transaction. A note over 30 percent of the price is a yellow flag. Over 40 percent is usually a red flag.
Why do SBA deals require a seller note?
The SBA 7(a) program requires at least 10 percent equity in most acquisition deals. That 10 percent can come from the buyer, from a seller note on "full standby" (no payments for 24 months), or a split. So if a buyer is using SBA financing, expect a seller note of at least 10 percent on standby. It is not optional, it is how the lender underwrites the file.
Should I accept an earnout?
Earnouts tie part of your payment to the business hitting performance targets after you sell. They are common for businesses with growth stories, customer concentration, or fuzzy pro-forma adjustments. Accept them cautiously. The rule of thumb: earnouts should never exceed 20 to 30 percent of your total consideration, should be based on metrics you can directly influence (revenue, not net profit), and should have clear definitions with audit rights.
What is a working capital peg and why does it matter?
A working capital peg is a target level of working capital (current assets minus current liabilities) that the business is expected to have at closing. If you deliver less than the peg, the price goes down. If you deliver more, the price goes up. Buyers use it to make sure they are not buying a business that has been stripped of cash, inventory, or receivables right before close. Fights over the peg calculation are one of the most common reasons deals get retraded at the last minute.
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