Seller financing in senior care

What does the seller actually receive?

Start with a schedule of who pays whom, how much is due and what must happen first. A proposal may combine cash, a seller note, an earn-out and an escrow holdback. These items have different risks even when the offer puts them under one price.

A note generally records a debt. An earn-out makes part of the price depend on later results or events. Escrow places funds under agreed release controls. A buyer-retained holdback may leave the money with the buyer instead of an independent holder. Read the documents to find the actual arrangement.

This table describes commercial questions, not standard contract terms. The letter-of-intent guide explains how to record the intended structure before the parties spend more on diligence.

Compare cash at closing with maximum price

Consider a fictional care-agency proposal with a $1,000,000 fixed price. The buyer would fund $800,000 at closing and give a $200,000 note. Of that closing amount, $60,000 would go into escrow. A separate earn-out could add up to $100,000 if its conditions are met.

The fixed price is $800,000 plus $200,000. Immediate cash is $800,000 minus $60,000. The maximum adds the possible $100,000 earn-out to the fixed price; escrow is already included and must not be added again. Note interest is financing income outside this price illustration.

Build separate seller and buyer schedules. The seller needs a realistic view of spendable proceeds. The buyer needs funds for price, fees, reserves and operations. Moving $200,000 into a note does not put $200,000 into a payroll account. The working-capital guide addresses the cash needed while collections develop.

Assess the borrower and repayment plan

Identify the legal borrower, its other debts and the source of repayment. A newly formed buyer company may have little support outside the acquired operation. Ask what funds remain after closing and which people will handle billing, staffing and financial reports. The seller's familiarity with the business does not establish the buyer's ability to run it.

Review the cash forecast after realistic owner replacement costs, rent, payroll, taxes, repairs and senior debt payments. Home care collections may lag wages; a facility may need work before more units can be occupied. Keep each service model's assumptions visible. A combined annual earnings figure can hide the month when cash runs short.

If the seller also keeps the building, rent and note payments may depend on the same operator. Use the retained-property seller cash test to examine the property obligations separately before assuming that two payment streams provide independent financial support.

Agree which financial reports the seller may receive and how problems are reported. Useful records might include a debt schedule, cash forecast and defined operating measures. Access rights need legal and privacy limits; a creditor relationship does not authorize unrestricted patient files. A clean report also does not guarantee repayment.

Understand the payment schedule and balloon risk

Interest, scheduled principal and the final maturity are separate terms. A note can have small current payments while leaving most of the principal due at the end. That final balance is often called a balloon. Ask how the buyer would pay it if a planned refinance were unavailable.

For arithmetic only, suppose the fictional $200,000 note charges 8% simple annual interest, paid monthly, with no principal payments for 24 months. Interest is about $1,333.33 per month, subject to cent rounding. Over two full years it is $32,000, while $200,000 of principal remains due at maturity. This is not an SBA-approved structure or a quoted market rate.

Here, cash available already reflects operating costs, taxes, maintenance spending and working-capital changes. The figures are assumed monthly amounts, not an accounting definition or a care-sector benchmark. Neither column funds the balloon. The weaker case needs a revised plan; delaying a bill does not cure the underlying shortage.

Check security, priority and standby terms

A promise to repay, a guarantee and a security interest are different forms of support. Identify the assets offered, existing claims and who must sign. Have counsel assess whether the proposed rights are properly created and enforceable. A document labeled secured does not establish the amount recoverable after costs and senior claims.

SBA's Form 155 illustrates how a standby creditor's payment and enforcement rights can be limited. The currently linked form has alternative payment choices on page one and restrictions on claims and collateral actions on page two. Its printed revision is September 1998; the current landing page was updated in April 2023. A lender may use its own form. (Source: SBA Form 155)

Ask how the actual note, standby agreement and senior loan documents work together. Identify any right to stop payments, change the senior debt or restrict enforcement. The seller should assess the proposed rights as a package, including what happens after a missed payment.

Confirm lender treatment before relying on seller debt

For a complete change to a new owner under Standard SBA 7(a), the reviewed SOP v8 rule generally requires at least 10% equity against total project costs. Its cost definition covers all costs needed to complete the ownership change, regardless of funding source, except lines of credit and 504 loans. It is not simply 10% of the asking price. Other ownership structures have separate rules.

A seller note counted toward that required equity must be on full standby for the life of the SBA loan. It may cover no more than half of the SBA-required equity. Full standby means no principal or interest payments during that term. Interest may accrue for later repayment; the debt is not forgiven. A note allowing current monthly interest, such as the earlier fictional example, does not meet this equity treatment. (Source: SOP v8, Standard 7(a) equity requirements)

Consider a separate fictional Standard 7(a) acquisition with $1,200,000 of lender-confirmed project costs, no excluded line of credit or 504 component, and no special ownership exception. Assume the lender accepts the minimum rule and the following sources.

The required equity is $120,000: 10% of $1,200,000. Half is $60,000. That seller-note ceiling leaves $60,000 of eligible buyer cash in this example. A larger seller note cannot increase the part counted toward the minimum. The lender may require more equity, and costs outside this assumed project still need funding. These figures do not establish a universal 5% buyer contribution or promise approval.

The lender must verify the cash before disbursing this type of loan. The SOP calls for evidence of a processed check or wire, at least 30 days of source-account statements, and borrower-account or settlement evidence showing the funds' receipt or use. A gift letter, note or financial statement alone does not prove a cash injection. Provide those records through the lender's secure process. (Source: SOP v8, closing documentation)

Rules checked September 7, 2026: SBA has announced SOP v8.1 for applications issued an SBA loan number on or after October 1, 2026. Its notice also refers to applications submitted through September 30. Have the lender confirm the governing version and notices for a transaction spanning those dates. Closing date alone does not settle that question. Obtain approval of the actual note and standby documents before relying on this example. (Source: SBA issuance notice)

Separate performance conditions from repayment

An earn-out may address disagreement about future results, but it introduces a measurement problem. Define the business perimeter, period, accounts, excluded items, reporting rights and dispute process. Explain how required spending and changes in operations affect the calculation. A fixed note and a performance condition should not be blurred into one reassuring promise.

A July 2010 SEC-filed home-health purchase agreement separately identifies fixed cash and contingent consideration; it also includes a right of offset. That historical contract shows why the payment clauses must be read together. It establishes neither current market terms nor approval for another transaction. (Source: historical agreement)

Have healthcare counsel assess incentives involving referrals or federally paid business. OIG describes the federal Anti-Kickback Statute's knowing-and-willful remuneration standard. This does not mean every earn-out violates the law or that a generic formula is safe. Required care, patient choice and sound staffing decisions must remain protected. (Source: HHS OIG)

Review taxes and the release of withheld money

Receiving price later does not mean every related tax is due later. IRS Publication 537 explains installment treatment and exceptions. Business assets need separate analysis; depreciation recapture can be taxable in the year of sale. Interest and contingent payments have their own rules. Have the CPA model the actual transaction before the seller commits to the cash schedule. (Source: IRS Publication 537, 2025)

For escrow, identify who holds the funds, what claims qualify and what instructions permit release. Ask whether undisputed money can be released while a specific claim remains open. An escrow deadline is not proof that the seller will receive the full deposit on that date. A buyer-retained holdback also requires a separate assessment of the buyer's ability to pay.

When should an owner consider seller financing?

A note may merit discussion when the fixed price is supported, the repayment plan is credible and the seller can tolerate delayed or reduced receipts. It is a weaker fit when the seller needs all proceeds promptly, cannot evaluate the borrower or depends on a refinance that has no reliable path. These are decision questions rather than universal rules.

Compare offers using the same schedule: immediate cash, later fixed amounts, possible contingent amounts, claims, interest, tax timing and remaining obligations. A lower headline offer can leave more usable cash or fewer unresolved risks. The choice depends on the seller's needs and the actual terms, not merely the largest number.

What should be ready before the terms are signed?

Prepare a written price breakdown, sources-and-uses schedule, repayment forecast and list of unresolved terms. Give counsel the note, security, guarantee, standby, escrow and purchase documents together. Give the tax adviser the asset allocation and expected payment dates. The lender needs the complete structure rather than a simplified headline.

Resolve inconsistent payment dates, missing reporting rights and unsupported refinance assumptions. Confirm how disputes and amendments are handled. The broker can organize those commercial questions, while the responsible advisers assess the legal, tax, lending and operating conclusions. Use the sale preparation guide to assemble the records for that review.

The SBA 7(a) definition separates the lender guarantee from buyer funds. Use the 7(a) acquisition guide to place any proposed seller debt beside the full purchase budget, required equity, other obligations and cash available after closing.

The seller-financed purchase question tests a note with regular principal payments and a remaining balance at maturity. Use the exercise to check whether the buyer’s cash forecast includes the final amount as well as the monthly commitment.