Part 3 of 4 in the series “Buying a California Healthcare Practice with an SBA 7(a) Loan.” Related articles: Part 1: Buying a Healthcare Practice? Five SBA Loan Issues That Can Derail Your Purchase (coming soon) · Part 2: Who Should Be the Buyer When an SBA Loan Funds a Healthcare Practice Purchase? (coming soon) · Part 4: After the Sale: Seller Roles, Earnouts, Leases, and Stock vs. Asset Deals in SBA-Financed Practice Acquisitions (coming soon)
A hypothetical. A physician agrees to sell a practice for $1.2 million. The buyer will pay $1,000,000 at closing, mostly with an SBA 7(a) loan. The remaining $200,000 will be paid through a promissory note to the seller. The seller expects monthly payments over five years. Then the lender’s valuation comes in below the price, and the buyer’s lender says the note must be on full standby: no payments of principal or interest for the entire term of the SBA loan.
That one condition changes the deal’s economics for the seller. Before agreeing to seller financing, both sides need to know what the lender will allow and what the seller can negotiate.
| Illustrative only | Seller’s monthly receipts on the $200,000 note |
|---|---|
| Current-pay note, 7% interest, 5 years, monthly amortization | about $3,960 |
| Full standby during the SBA loan | $0 |
Illustrative only. A standby note’s interest rate, maturity, and repayment terms after the SBA loan is repaid have to be negotiated separately and approved by the lender.
The rules below come from SBA’s current lending manual, SOP 50 10 8.1. It applies to applications that receive an SBA loan number on or after October 1, 2026. Earlier applications may follow the prior version.
Three different jobs a seller note can do
Seller financing can serve three different purposes in an SBA deal. Each one follows different rules.
1. Counting toward the buyer’s required equity. For a typical first-time acquisition, the buyer must contribute equity of at least 10% of total project costs, and that minimum cannot be reduced. Seller debt can count toward it only if it is subordinated to the lender and on full standby for the term of the SBA loan. Even then, seller standby debt and the other “limited” equity sources together may provide no more than half of the required injection. Lenders generally will not let more seller financing replace the buyer’s own cash.
2. Financing part of the price without counting as equity. A seller note can receive regular payments during the SBA loan, but then it is ordinary acquisition debt, not equity. The lender counts its payments when testing whether the practice’s cash flow can cover all acquisition debt. Total acquisition debt, including seller debt that is not on full standby, generally cannot exceed the lender’s business valuation. The lender reviews the note’s terms and may require subordination as part of its own credit conditions. Any such note should be presented to the lender, and approved in writing, before it goes into the documents.
3. Covering a gap between price and valuation. If the agreed price is higher than the lender’s valuation, the difference must be made up with equity. SBA allows additional limited-source funds, including seller financing, to help cover that gap, but those funds must also be on full standby.
These uses are not interchangeable. A standby note does not automatically solve an equity or valuation problem. Whether it works depends on the whole structure: the price, the valuation, the buyer’s cash, and the cash flow.
What full standby means for the seller
Under the current rules, full standby means no payments of principal or interest for the term of the SBA loan. Interest may accrue during that period, but it is added to the note and repaid only after the SBA loan is paid in full. The standby agreement, on SBA’s form or the lender’s equivalent with the note attached, also requires the seller to subordinate any lien and to take no action against the borrower or the collateral without the lender’s consent. Whoever provides standby debt, including the seller, may not take an equity investment in the business.
Some sellers rely on older advice. A 2023 version of the SOP allowed seller debt to count as equity in some cases if it was on standby for only the first 24 months. That approach has been superseded.
The seller’s economic risk
A seller on full standby is, in effect, waiting until the buyer’s SBA loan is repaid. Change-of-ownership loans generally amortize over no more than 10 years unless real estate is involved. Several questions are worth thinking through before agreeing:
- Time. Payment may not begin for many years. The seller should be comfortable waiting that long, with accrued interest as the main compensation for the delay.
- Priority. If the practice struggles or fails, the SBA lender is paid first. The seller’s note may be partly or entirely unpaid.
- Security. A subordinated lien may have little practical value behind the lender. Whether any other meaningful security is available is a negotiation point.
- A later sale. If the buyer later sells the practice, how the seller’s note is treated is something the parties should negotiate. Because the borrower generally needs the lender’s consent to change ownership, a later sale also involves the lender.
- Refinancing. The SOP says a seller-financed note is eligible for refinancing only if it has been “in place and current (not on standby) for at least 36 months” after the change of ownership. Another passage says “in place and current for 36 months.” A seller on full standby should not count on being refinanced out early and should confirm the lender’s reading.
These are points to negotiate and analyze, not fixed answers.
Healthcare-specific pressure points
Practice sales add their own complications. A selling clinician often expects to keep treating patients or to be paid for post-closing transition work. In a typical acquisition, the seller generally cannot stay on as an employee, consulting is capped at 24 months in total, and earnouts are prohibited (see Part 4). Compensation for transition services should not function as disguised payment on a standby note or as contingent purchase price. Lenders may look closely at that.
There is also a repayment issue. When the selling clinician’s own production leaves, the practice’s cash flow may decline, and the buyer’s ability to repay both the SBA loan and any eventual seller note may decline with it. Whether these issues arise depends on the practice. They deserve their own analysis.
Lender approval is not an SBA waiver
The parties should get the lender’s written confirmation of which SOP version and transaction category apply, because both affect the equity requirement and how the seller note is treated. A lender’s agreement to something SBA’s rules prohibit does not change the rule. That is one reason lenders tend to read these provisions conservatively.
When counsel is particularly valuable
For both buyers and sellers, legal advice is most useful before signing a letter of intent, before agreeing to seller financing, and before accepting the lender’s proposed standby or transition terms. Seller-note terms are much harder to change once the lender has approved a structure. How these rules apply depends on the practice, the parties, and the lender, and no structure guarantees approval, closing, or payment.
Sources: SBA SOP 50 10 (version 8.1 and prior versions) · SBA Information Notice 5000-880695
Educational information only, current as of November 2026. This article is not legal, tax, or financial advice, and reading it does not create an attorney-client relationship. The example and figures above are hypothetical and illustrative. SBA rules, lender requirements, and California and federal law change, and how they apply depends on the facts of each transaction. Buyers and sellers should consult their own counsel and confirm the current SOP version and their lender’s written conditions before relying on anything here.
Matt Kinley, Esq., LL.M. in Health Law · 180 E. Ocean Blvd., Ste. 100-J, Long Beach, CA 90802 · (562) 522-3563 · matt@kinleylawpractice.com