When business owners begin considering a sale, their motivations tend to fall into a few common categories:
- Burnout from long-term operational demands
- Business stagnation or a plateau in growth
- Distraction from new ventures or interests (shiny object syndrome)
- Recognition of limited skills or resources to reach the next level
- Immediate need for capital to pursue other opportunities
- Retirement planning and transition
While the list is not exhaustive, most reasons for selling tend to cluster around these key drivers.
Regardless of motivation, action typically occurs when there is a problem or when one is anticipated. Sellers move when the urgency becomes clear, either in the present or on the horizon.
At a more fundamental level, most sellers are looking to accomplish one or more of the following outcomes:
- Reduce risk by converting ownership into liquid assets
- Gain personal freedom, whether that means working less or stepping away entirely
- Unlock equity and generate income through reinvestment
- Ensure continuity of the business as a personal legacy or identity
A Typical SBA-Backed Sale
To understand the mechanics of a traditional sale, consider a common scenario: a niche manufacturing business generates $3 million in revenue and $500,000 in Seller’s Discretionary Earnings (SDE).
Standard SBA loan parameters include:
- 10% equity injection from the buyer
- 10% standby seller note (treated as equity)
- 80% of the total funds are paid to the seller at close
- Minimum debt service coverage ratio (DSCR) of 1.25, though 1.5 is more typical
- Current SBA interest rates are hovering around 11.25%
A DSCR of 1.25 on $500,000 in SDE allows for $400,000 in annual debt service. At 11.25%, that supports a loan of approximately $2.4 million. Including the equity contributions from buyer and seller, this results in a total deal value of around $3 million.
The seller receives $2.7 million in cash at close, with a $300,000 note due over ten years. After applying a conservative 20% capital gains tax (not tax advice), net proceeds total approximately $2.16 million.
If this amount is reinvested at a 5% annual return, it generates $110,000 in annual income. This scenario reflects a best-case outcome: maximum leverage, no transaction delays, and no inclusion of deal-related fees.
In short, a business generating $500,000 annually is exchanged for de-risked annual income of $110,000 and a $2.2 million investment portfolio.
Evaluating the Outcome
Sellers facing this decision must consider a few key questions:
- Is $2.2 million in liquid assets enough to reduce personal and financial risk?
- Is $110,000 per year sufficient to support a desired lifestyle or retirement plan?
- Is complete disengagement from the business necessary, or is continued involvement acceptable?
- Is there confidence in the buyer’s ability to lead the business going forward?
These are personal calculations. Each depends on individual goals, risk tolerance, and expectations.
The Buyer’s Position
From the buyer’s perspective, this deal requires a $300,000 equity investment. With $500,000 in income and $400,000 in debt service, the deal offers a 33% cash-on-cash return on paper.
However, this figure assumes no salary and assigns no value to the buyer’s labor.
However, this figure assumes no salary and assigns no value to the buyer’s labor.
Additionally, the buyer assumes $2.4 million in debt and must meet repayment obligations to the SBA. The margin for error is slim.
Without confidence in the ability to improve profitability significantly and with minimal execution risk such a deal carries considerable pressure.
Exploring an Alternative: The Operating Partnership Model
In the same business scenario, a different structure can present a more flexible path. Instead of purchasing 100% of the company, the buyer acquires a 10% equity stake (or enters through convertible debt) with the same $300,000 investment.
The buyer receives a nominal salary, say, $100,000 per year and begins assuming management responsibilities either gradually or immediately.
The seller retains $400,000 in cash flow, which can be used for investment or lifestyle expenses. If structured properly, the buyer may negotiate an option to purchase the remaining equity later at a pre-agreed valuation, avoiding future market multiples on the value they helped create.
The seller retains $400,000 in cash flow, whichThis structure can deliver continued income, operational relief, and a future exit path all without the risks of full leverage. can be used for investment or lifestyle expenses. If structured properly, the buyer may negotiate an option to purchase the remaining equity later at a pre-agreed valuation, avoiding future market multiples on the value they helped create.
Key Elements to Negotiate
Each deal is unique, but there are common components to address in a partnership structure:
- 70% of goods sold on Amazon are made in China.
- Approximately 50% of all U.S. e-commerce inventory or
- Determining whether the buyer’s contribution is equity or debt
- Establishing how cash flow will be shared after closing
- Defining the buyer’s employment terms and responsibilities
- Clarifying financial controls and decision-making authority
- Setting the size and purpose of the initial down payment
- Outlining procedures for exit or dissolution if the arrangement fails
This type of structure can often be completed quickly, since it does not rely on lender approval or bank underwriting timelines.
Weighing the Tradeoffs
As with any arrangement, tradeoffs exist. In this model:
- The seller remains connected to the business and its outcomes
- Some level of involvement may continue, depending on the agreement
- Full de-risking is delayed, though income may be higher than in a standard buyout
- The buyer is likely to be more aligned and committed than a hired operator
Ultimately, this approach represents a phased transition rather than a one-time exit. The upside is the ability to retain control, recruit strong operational leadership, and benefit from ongoing performance. In many cases, the incoming operator can achieve growth the previous owner was unable to unlock alone.
Whether this structure is the right fit depends on the seller’s objectives, the market response to the business, and the quality of offers received. If a proposed deal does not meet personal or financial goals, it may be worth exploring alternatives.