Seller financing and earnouts in Chicago deals: what the buyer's accountant will ask for

The price in the letter of intent is one number. The money that reaches you is usually three: cash at closing, a note you carry for the buyer, and sometimes a payment that depends on how the business does after you leave. Owners negotiate the first number hard and the other two late, which is backwards, because the other two are where a buyer's accountant moves the price without appearing to. This article is the version of that conversation we have across the desk, with the published figures and the tax rules, so you can set your own floor before anyone asks you to finance their purchase.

How much of the price do sellers actually get at closing?

Most of it. In the IBBA and M&A Source Market Pulse survey for the second quarter of 2026 (255 brokers and advisors, 181 closed transactions), sellers received 83 to 92 percent of the price in cash at closing on average, and seller financing accounted for less than 10 percent of most deals, which the survey called somewhat below trend (Market Pulse Q2 2026). The quarter before, the same survey broke the structure out by deal size:

Source: IBBA and M&A Source, Market Pulse Q1 2026 Executive Summary, survey of closed deals in the first quarter of 2026. The two columns do not add to 100 because the balance of the price was other structure: earnouts, equity the seller kept, and escrows. Multiples are the survey's reported medians, SDE below $2 million and EBITDA above it.

Two things stand out for a Chicago owner. The $2 million to $5 million bracket, where most of the family manufacturers, distributors and contractors we work with sit, had the lowest cash at closing of any size, 76 percent, and the longest wait between offer and closing. That is the bracket where the buyer's lender is largest relative to the deal and the buyer's accountant does the most work, and both of them get paid for finding reasons to move price out of the closing wire.

The second is the gap between what buyers want and what owners plan to give. BizBuySell's Q2 2026 Insight Report found that 90 percent of buyers expect seller financing to be part of their acquisition, while only 29 percent of owners plan to offer it, and 78 percent of buyers expect to use an SBA loan (BizBuySell Insight Report, Q2 2026). The Chicago-metro figures we track separately put 2024 closed sales at 2.43 times cash flow and 92 cents on the asking dollar; the full tables are in what Chicagoland businesses actually sell for. A seller who walks in expecting all cash and a buyer who walks in expecting a note from you are going to settle somewhere, and the settlement goes better for the side that did the arithmetic first.

What is a seller note, and what are normal terms?

A seller note is a loan from you to the buyer for part of the price, documented in a promissory note at closing. The buyer pays you back over a set term with interest, and the note is usually secured by the assets of the business you just sold, behind the buyer's bank. The survey figures above put the typical note at 5 to 16 percent of the price depending on size. The terms are negotiated like everything else, and the ones that matter are the rate, the term, the security, the personal guarantee, and what happens if the buyer's bank says you cannot be paid.

The accountant's view of a note is simple: it is a receivable from a company you no longer control, backed by collateral a bank already has first claim on. Price it that way. A note at 7 or 8 percent over five years with a personal guarantee from the buyer and a right to take the business back on default is a reasonable instrument. A note at a below-market rate, unsecured, with a ten-year term and no guarantee is a discount on the price written in a way that does not look like one. If a buyer wants the second kind, the honest response is to ask what the cash price would be without it, and compare.

Three terms deserve a sentence each. Subordination: the buyer's lender will require your note to sit behind its loan, which is normal, but read what the subordination agreement says about payments to you while the bank loan is current. Set-off: buyers often ask for the right to reduce note payments by any claim they later make against you under the purchase agreement; cap it and require notice. Acceleration: if the buyer sells the business or refinances, the note should be paid in full at that time, not assigned to someone you never met.

Why does the SBA lender care about my note?

Because since 78 percent of buyers plan to use an SBA loan, the SBA's rules on seller notes are, in practice, the rules of your deal. The SBA's current lending procedures, SOP 50 10 8, took effect on June 1, 2025. For a complete change of ownership they require the buyer to put in equity of at least 10 percent of the total project cost. A seller note can count toward that equity only if two things are true: it is on full standby for the life of the SBA loan, meaning no principal or interest payments to you until the bank is repaid, and it does not exceed half of the required injection (SBA, SOP 50 10 8). SBA 7(a) acquisition loans typically run ten years.

Put numbers on it. On a $2 million price, the buyer needs $200,000 of equity. If they are short, they will ask you for a note of up to $100,000 on full standby, which means a $100,000 piece of your price that pays nothing for a decade and sits behind a $1.7 million bank loan. Some sellers accept that in exchange for a higher headline price; some would rather take $1.9 million in cash and be done. Either answer is defensible. What is not defensible is finding out what "standby" means at the closing table, which is where most owners learn it.

A seller note that is not needed for the equity injection is a different animal: the lender will still require subordination and may limit payments to you if the business misses its loan covenants, but regular monthly payments are usually allowed. Ask the buyer's lender, in writing, which kind of note they are underwriting before you agree to a number. The buyer's accountant already knows.

What is an earnout, and when does a buyer ask for one?

An earnout is a part of the price that is paid later, only if the business hits a target after the sale. Buyers propose one when they do not believe the earnings they are being asked to pay for will survive the owner's departure, and they are honest about it about half the time. The usual triggers are an owner who holds the key customer relationships personally, one customer over about 20 percent of revenue, a strong current year that is not yet in the trailing twelve months the price was set on, or a plain disagreement about what the business is worth, where the earnout is how two numbers get to one.

The accountant's problem with earnouts is that you are being paid on the performance of a company someone else now runs, measured by numbers someone else now prepares. Every term in the earnout exists to narrow that problem, and the buyer's accountant will have a view on each one:

• The metric. Revenue or gross profit is hard for a new owner to push down by accident; EBITDA is easy, because the buyer's management fees, new salaries, integration costs and accounting policies all land in it. If the earnout must be on EBITDA, the definition should freeze the accounting policies and add-backs used in the trailing twelve months you priced on, and exclude the buyer's overhead allocations and acquisition costs.
• The period and the cap. One to three years is common. Longer than that and you are a minority partner without a vote. The payment should have a stated maximum and, ideally, a stated floor if the target is partly met rather than all-or-nothing.
• Information rights. Monthly financials in the same format you used, access to the general ledger, and the right to have an independent accountant check the calculation at the buyer's cost if the difference exceeds a stated amount.
• Operating covenants. A promise to run the business in the ordinary course, not to divert customers or staff to a sister company, and to keep the books on a consistent basis. Without this, the metric can be met or missed by decisions that have nothing to do with the business.
• Acceleration. If the buyer sells the business, shuts the location or terminates you from a transition role without cause, the earnout should be paid at the maximum, or at a stated amount, immediately.

Our rule across the desk is that an earnout should buy you upside you could not get in cash, not replace cash you were going to get anyway. If a buyer offers $3 million with $500,000 of it in a two-year earnout, ask what they would pay in cash alone. If the answer is $2.7 million, the earnout is worth $300,000 of risk to you, and you can decide whether the targets are ones you would bet on. If the answer is $3 million, there was never an earnout question at all.

How are seller notes and earnouts taxed?

Differently from cash, and the difference is worth a conversation with your own CPA before the letter of intent is signed, not after. We are not giving tax advice here; these are the rules as the IRS publishes them, so you know which questions to ask.

A sale with payments after the year of closing is generally an installment sale. Under the installment method (IRS Publication 537, reported on Form 6252), you recognize the gain as the payments come in rather than all at once, which can keep part of the gain in lower brackets across several years. Three exceptions bite owners of equipment-heavy businesses. Depreciation recapture on equipment and vehicles is taxed as ordinary income in the year of sale whether or not you have received the cash for it. Gain on inventory is not eligible for the installment method. And the note has to carry a stated interest rate at or above the IRS applicable federal rate, or the IRS treats part of each payment as interest anyway (the unstated interest rules in Publication 537), which turns capital gain into ordinary income and changes the buyer's deduction too.

An earnout is taxed as a contingent-payment installment sale: because the total price is not known at closing, the gain is spread across the payments under special allocation rules, and the IRS imputes interest on each contingent payment as it arrives. The result is that a portion of every earnout check is ordinary interest income rather than capital gain, and the character of the rest depends on which assets the earnout is allocated to.

That allocation is the last piece. In an asset sale, you and the buyer must agree on how the total price, including the note and the earnout, is spread across equipment, inventory, intangibles and goodwill, and both of you report it to the IRS on Form 8594. The buyer wants more of the price on equipment, which they depreciate quickly; you want more on goodwill, which is capital gain to you. A seller note or earnout allocated to goodwill is a different tax result from the same dollars allocated to a non-compete, which is ordinary income. Settle the allocation in the letter of intent, while you still have the stronger hand, and make the deferred pieces part of it.

What will the buyer's accountant ask for before agreeing to the structure?

The structure a buyer proposes is a direct reading of how much they trust your numbers. A buyer who believes the earnings pays in cash; a buyer who does not asks you to finance the part they doubt. So the way to keep price out of notes and earnouts is to answer the accountant's questions before they are asked. In our experience these six do most of the work; the longer list is in seven things a buyer's accountant finds first.

1. A trailing-twelve-month P&L that ties to the bank statements and the tax returns.

   The accountant rebuilds earnings from the deposits up. If your statements, your returns and your bank agree to the dollar, the rebuild confirms your number instead of replacing it.

2. An add-back schedule with the support for every line.

   Each owner expense you add back needs the invoice, the payroll record or the lease behind it. Add-backs with support are earnings; add-backs without support become the earnout.

3. Revenue by customer for three years.

   One customer over about 20 percent of revenue is the first question and the most common reason for an earnout. A written contract with that customer, assignable on sale, is the answer that keeps the price in cash.

4. A working-capital target set before the letter of intent.

   The buyer pays for a running business, which includes a normal level of receivables and inventory. Agree what normal is from your own twelve-month average; otherwise the adjustment at closing is a surprise deduction, often six figures.

5. The lease, the licenses and the liens.

   An assignable lease, licenses that transfer or can be reissued to the buyer, and a clean UCC search. Each one that is missing becomes an escrow holdback, which is a small earnout with a different name.

6. A transition plan with dates.

   Who the customers call after you leave, who holds the licenses, and how long you will stay. The more specific the plan, the less of the price the buyer needs to hold back against the risk of your departure.

Illinois adds one holdback of its own. The buyer is required to notify the Illinois Department of Revenue of the sale on Form CBS-1 before closing, and the Department can direct the buyer to withhold part of the purchase price against any unpaid state taxes of yours. Clean state tax accounts, confirmed before you go to market, keep that number at zero; the notice itself and its timing are covered in selling a business in Illinois.

How do we handle structure at Lakeshore?

We set it before the buyer does. Every listing we take to market has the earnings rebuilt from the tax returns and bank statements first, by a CPA, with the add-back support in the data room before the first buyer sees a number. That is what makes an all-cash offer, or close to it, possible for a $2 million to $5 million manufacturer or contractor; buyers finance what they doubt, and we try to leave them nothing to doubt. The listing range we agree with you includes a cash-at-closing floor, so that a higher headline price built on a standby note or a long earnout is compared against it on the same page. Our fee is 10 percent of the price, agreed in writing before going to market, with no retainer; the full mechanics of a sale are in how we sell a business.

We have also sat on the other side. When Lakeshore buys a Chicagoland business ourselves we say so in writing up front, and we structure the same way we advise: cash for earnings we can verify, a note only where a lender requires it, and an earnout only to pay for upside the trailing twelve months cannot yet prove. If you want to know what your business would bring in cash today, on verified earnings, the free value range comes back within two business days and names the two or three items a buyer's accountant would try to push into paper.