Acquisition funding structure strategies — the capital stack primer.

The funding structure dictates how an agency acquisition is financed and directly influences risk for both parties — and ultimately, the seller's net proceeds. Sellers prefer high cash-at-close to reduce risk; buyers use Seller Notes and Earnouts to align goals and bridge valuation gaps.

§ 01 · Cash at Close — the senior debt + equity layer50–80% of price.

Cash at Close represents the immediate liquidity event — the only "risk-free" component, typically 50–80% of total price. Most buyers fund the cash portion through external leverage.

SBA 7(a) loans. Common for deals under $5M. Favorable terms (10-year amortization) but strict requirements: adherence to standard operating procedures, and often a mandatory seller note placed on standby (no payments for up to 24 months) if the buyer's equity injection is minimal. The DSCR requirement of 1.15×–1.25× caps borrowing capacity, which is why Individual-buyer transactions cluster in the 4–6× distressed-or-internal band per the readiness model — the math literally limits what SBA financing can fund.

Commercial loans. For larger deals. Provide capital but require stricter covenants, higher Debt Service Coverage Ratios (DSCR), and tangible collateral — which can be scarce in agency deals dominated by intangible assets (the book of business).

Equity injection. Lenders rarely finance 100% of a transaction. Buyers typically inject 10–30% of the purchase price as equity. This "skin in the game" validates the buyer's commitment to the lender. Beyond the purchase price, buyers must have 60–90 days of working capital on hand post-closing to fund operations while carrier appointments transfer and commissions are redirected.

§ 02 · Seller Notes — gap financing10–30%, Prime + 2–3%.

Seller Notes are debt instruments where the seller acts as the lender for a portion of the purchase price — typically 10–30%. This Gap Financing bridges the difference between what the bank will lend and the total sale price.

Promissory note structure. Interest rates are typically negotiated at Prime plus 2–3% — 7–9% in the 2026 environment with Prime at 7.5–8.5%. Amortization periods range from 3 to 7 years; shorter terms reduce seller risk, longer terms aid buyer cash flow. Seller notes are almost always subordinated to senior bank debt — if the agency faces distress, the bank gets paid first, and seller payments may be paused ("standby") if covenants are breached.

Security mechanisms. Because the physical assets of an agency (desks, computers) have little collateral value, the note is secured by the business itself. Stock Pledge Agreement: the buyer pledges the shares of the acquired agency back to the seller. If the buyer defaults, the seller can foreclose and retake ownership. UCC-1 Filing: sellers perfect their security interest by filing a UCC-1 statement. Without this filing, they become unsecured creditors in the event of buyer bankruptcy — recovering 0–10 cents on the dollar.

§ 03 · Earnouts — performance-based offenseBridges valuation gaps.

Earnouts are contingent payments classified as "Offense" — extra money paid only if the agency achieves specific post-closing milestones. They are distinct from Holdbacks (escrowed funds), which are "Defense" against past liabilities.

Bridging valuation gaps. When a seller believes the agency is worth $2M based on future growth but the buyer values it at $1.5M based on historicals, an earnout bridges the $500K gap. If growth materializes, the seller gets the higher price; if not, the buyer is protected. Used well, this is what enables prepared sellers to reach the 10–12× competitive band per the readiness model — the buyer pays for documented potential, contingent on it actually arriving.

Performance metrics and risks. Sellers should negotiate earnouts based on Top-Line Revenue or Retention — harder for a buyer to manipulate via accounting allocations than EBITDA or Net Income. Post-closing, the buyer controls the agency: decisions to cut staff, change carriers, or migrate systems can negatively impact performance. Sellers must negotiate Anti-Interference provisions or Transition Service Agreements (TSA) to ensure the tools exist to achieve earnout targets.

§ 04 · The funding mix and deal certaintyHow structure shapes outcomes.

The funding mix shapes deal certainty more than the headline number. A 70% cash plus 20% note (secured) plus 10% earnout structure has materially different expected-value characteristics than a 50% cash plus 30% earnout plus 20% rollover structure even at the same total price. Cash at close has 100% probability. Secured seller notes around 90%. Earnouts around 50% baseline. Rollover equity around 70%.

The seller's first negotiating move on any offer: ask what the funding structure looks like on the buyer's side. The answer reveals what cash is actually available, what financing constraints will shape the terms, and where the buyer's incentive to push contingency back onto the seller actually comes from.

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