The Highest Offer Is Not Always the Best Offer, and the Structure Is Why

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A higher purchase price built on restricted financing can leave a seller worse off over the next five to ten years than a lower one that is cleanly funded. A recent SBA change is a good reason to look harder at structure.

When a seller has more than one offer in front of them, the instinct is to read down the page to the number and rank the offers by it. The number matters, but it is not the deal. The structure behind the number is the deal, and the structure is where a seller actually wins or loses over the years that follow a sale. A higher offer that depends on financing the buyer cannot cleanly get, or that pushes risk onto the seller to make the price work, can be worth less than a lower offer that closes clean and pays as promised. I have watched sellers take less money for more certainty, and be right to.

A change in the SBA rules that took effect October 1 is a useful illustration, because it quietly removed a structuring move that used to let buyers offer a higher number without the cash flow to support it, and it did so in a way most sellers have not heard about.

The move was the interest-only seller note. Here is how it worked, and why it mattered.

Say a seller agreed to finance $500,000 of the purchase price at 8 percent, interest only for five years. The seller received $40,000 a year during those five years, which is the interest, and no principal. The buyer got five years without any principal payments on that note, which preserved the business’s cash flow for servicing the bank debt. And when the lender calculated whether the business could cover its debt, only that $40,000 of annual interest counted as the seller-note obligation. That lower number helped the deal clear the lender’s coverage test, which in turn could support a higher purchase price than fully amortizing payments would have allowed.

Here is the part a seller needs to see clearly, and it is the whole point. That structure never improved the seller’s cash flow. It improved the buyer’s, and it bought a higher headline price. The seller, in exchange for that bigger number, accepted five years of deferred principal, the collection risk that comes with carrying paper, and a $500,000 balloon sitting at the end of the term that has to be refinanced or paid when it comes due. The seller was trading real risk for a better number on the page.

What changed October 1 is that the structuring benefit is gone. Under SOP 50 10 8.1, an interest-only acquisition note that is not on full standby now has to be evaluated for the lender’s coverage test using an assumed amortization of no more than ten years, rather than the actual interest-only payment. The numbers make the effect plain.

The buyer’s actual payment to the seller has not changed. It is still $40,000. But the lender now has to pretend, for coverage purposes, that the note costs about $72,800 a year to service, which is roughly $32,800 more than before. That extra load can push a deal below the coverage line it used to clear.

The rule does not prohibit interest-only seller notes. It eliminates the financing advantage they used to carry. And that is exactly why it matters to a seller choosing among offers. A seller can no longer assume that agreeing to an interest-only note will let a buyer finance a higher purchase price, because the structure no longer does that work. If a transaction now fails the lender’s coverage test, the parties have to fix it some other way, with a lower price, more buyer equity, or a seller note on full standby.

Full standby is a meaningfully harder ask of the seller. It means no payments at all, principal or interest, for the entire term of the SBA loan, when the note is being used toward the buyer’s required equity injection. A seller who was willing to carry an interest-only note for the interest income is being asked, under standby, to carry paper that pays them nothing for years. That is a different proposition, and a seller should understand it as one before they agree to it.

The broader lesson is the one worth carrying past this particular rule. When you are the seller weighing offers, the financing structure behind each number determines what your actual economic outcome looks like over the next five to ten years. Two offers at the same price can be worth very different amounts to you depending on how the buyer is funded, what you are being asked to carry, and how likely the deal is to close at all. The highest number is a starting point for that analysis, not the end of it. The best offer is the one that gets you the most certain economic result over the years that follow, and reading for that takes looking past the first line.

A note for the CPAs who refer clients to me

When a client of yours is selling and offers start coming in, this is a place where your read on the numbers is worth a great deal, because the economic difference between offers is often buried in the financing structure rather than visible in the price. A client looking at an interest-only seller note, or a standby note, is making a decision with real tax and cash-flow consequences over a multi-year horizon, including the balloon at the end and the collection risk of carrying paper. That is your territory as much as anyone’s. When a seller client is evaluating competing offers, having me and you both looking at the structure means the client ranks them by what they will actually net over time, not by the headline number, and you stay in the seat on the cash-flow and tax modeling that decision depends on.