The final installment in Patrick Flood’s three-part series, developed with Michael Shea — Owners In Honor board member, Certified Exit Planning Advisor, and business broker with Transworld Business Advisors — turns to capital, and specifically to why seller financing is reemerging as a critical tool in a tightening credit market.
A Market That Feels “Eerily Familiar”
The scale of the coming ownership transition is well documented: McKinsey projects roughly six million small and mid-sized businesses facing a transition by 2035, with up to $5 trillion in enterprise value involved. What’s changed recently is the financing environment around that transition. Live Oak Bank’s Q3 2026 BusinessPulse survey shows small-business concern about rising costs climbing to 76%, excess cash reserves dropping 20 points in a single quarter, and credit denials concentrated hard on Main Street — nearly one in five small firms that applied for financing were turned down outright, compared to just 4% of middle-market applicants. Shea, drawing on two decades of brokering Florida deals, calls the current environment “eerily familiar” to the post-2008 period: healthy businesses with qualified buyers getting sent back by underwriters for more seasoning or bigger injections — not because the business got worse, but because money got more expensive and cautious.
Why “Imperfect” Books Often Mean Real Value
Shea pushes back on a common first-time buyer assumption — that a messy Main Street P&L signals a bad business. Often it’s the opposite: value hiding in plain sight, with the owner functioning as the operating system. The risk cuts both ways, though — if the business only runs because the owner runs it, a buyer isn’t purchasing a company, they’re purchasing a job that happens to require a specific person. The businesses that finance cleanly are the ones where owners spent years making themselves replaceable.
Seller Financing Isn’t New — It’s a Return
Flood and Shea trace seller financing back to before SBA guarantees existed: owners carrying part of the purchase price because local banks lacked capital or credit had tightened. The arrangement signals confidence — a seller willing to leave money in the business is making a quiet statement that it’ll keep producing cash after they leave, and that the buyer can steward it. Shea is blunt about the flip side: a seller who refuses to carry a single dollar of the note is often telling you something about the business the financials don’t show.
How the Math Actually Works
In a favorable market, a bank might finance 90% of a deal, leaving the buyer 10%. In a tighter market, that same lender may only go to 70% — and the gap has to come from somewhere. Increasingly, it’s the seller. Under current SBA rules (SOP 50 10 8), a 7(a) change-of-ownership requires a minimum 10% equity injection, and a seller note can satisfy up to half of that — but only if it sits on full standby, no principal or interest, for the life of the loan (typically ten years). Shea is explicit: deals get re-traded in week ten when someone assumes a seller note can paper over the whole injection. It can’t — the structure has to be right from the letter of intent forward.
The Data Behind the Caution
Shea’s insistence that a note must be serviceable from the business’s own cash flow — not the buyer’s optimism — is backed by hard numbers. Lumos Data shows SBA 7(a) trailing-twelve-month default rates hitting 4.8% in March 2026, the highest since 2013 and roughly three times the 2021 trough. Loans from the most recent vintage (FY2024) were defaulting at 3.4% in their first year, more than double the comparable 2016 rate. The stress concentrates exactly where thin coverage leaves no room for a missed projection.
Risk Shared, Not Transferred
Flood and Shea frame seller financing as risk redistribution rather than risk elimination. The buyer takes on an obligation in the years when cash flow is least predictable. The seller trades a lump sum at closing for liquidity spread over years, with the business’s ongoing performance now tied to their own retirement plan. Shea notes the best notes he’s closed come with sellers who stay engaged well past closing — answering calls, making introductions, walking a new owner through the one vendor relationship that holds everything together — because their own final payments depend on the business staying healthy.
Beyond the Balance Sheet: Why This Matters for Ownership Broadly
The piece closes on a bigger point: exit planning has historically served larger companies that can afford five- and six-figure advisory engagements years ahead of a sale. The corner contractor and the two-location restaurant rarely get that attention — and when owners can’t plan, outcomes narrow toward closure, absorption by a competitor, or a distant consolidator. Flood and Shea argue that accessible, low-cost exit planning and tools like seller financing aren’t just deal mechanics — they’re infrastructure for keeping ownership broadly distributed, which they tie directly to the health of self-governing communities.
Read Part III of “The Coming Ownership Transfer” in full on LinkedIn →
https://www.linkedin.com/pulse/coming-ownership-transfer-part-iii-seller-financing-patrick-flood-i504c/
