When I sit down with my CFO Peter Baldwin, the conversation doesn't start with multiples or valuations or who's buying what.
It starts with a question most agency owners haven't seriously asked themselves.
Where is the money actually coming from?
Not in theory. Not in the way you've read about it online or heard someone describe their "exit" on a podcast. In reality. In your deal. Given the current lending environment, the risk profile of your specific business, and the expectations of the person sitting across the table from you.
That's the question this series is designed to answer.
Peter Baldwin has been working alongside me on M&A transactions since 2022. He's a CFO with a background in investment banking, private equity, restructuring, and leverage finance. He's closed deals ranging from under two million dollars to eighteen billion. And across all of them, one principle holds.
The business should be able to support the structure you put in place to fund it. Not the other way around.
This is episode one of three. By the end of this conversation, you'll understand why the SBA model is breaking down, what the capital stack actually looks like, and why seller notes are often a better deal for everyone involved. Episodes two and three will go deeper into the structures and instruments that we use most in the deals.
The Mental Model That's Working Against You
Here's the problem most first-time acquirers bring into the room.
They think about buying a business the same way they think about buying a house.
You identify an asset. You ascribe a value to it. You put some money down. You borrow the rest from a lender who holds the asset as collateral. You make payments. Eventually you own it outright.
That model works in real estate because the asset is stable, typically appreciating, and has a clear collateral value a bank can underwrite against. It's the foundation of the American economy. Fannie Mae. Freddie Mac. Conventional mortgages. Thirty years of built infrastructure to support that exact transaction.
The SBA 7A loan is the closest equivalent for small business acquisitions. Longer term, moderate interest rate, conservative amortization. Ten percent down, and the bank carries the other ninety. The seller gets most of their money at close. The buyer takes on the debt. The government guarantees a significant portion of the risk, which allows the lender to recycle capital into the next deal.
It's a system that has worked, for a particular type of deal, with a particular type of asset.
The problem is that marketing and advertising agencies aren't that asset.
Why the SBA Is Breaking for Agency Deals Right Now
Default rates on SBA loans to marketing and advertising agencies have nearly doubled from their historical averages. Peter Baldwin cited numbers around 1.4% versus a historical range of 0.6 to 0.8%. That might sound small, but in the context of an already-stressed SBA lending portfolio, it's enough to move the needle.
The SBA has been under pressure since it was used as an economic recovery tool during COVID. EID loans, wildfire relief programs, broader portfolio underperformance. And now, as default rates tick up in specific NAICS codes, they're tightening. What used to be a relatively streamlined lending product is becoming more scrutinized, more conservative, and harder to access for exactly the kinds of deals where buyers have been relying on it most.
There's a compound problem on top of that. The SBA recently relaxed its lending standards to allow more aggressive deal structures, including standby seller notes that could satisfy a portion of the equity requirement. That window has now largely closed. As of early 2026, those standby seller notes have to behave more like true equity instruments — they can't amortize at all during the life of the SBA loan. Which means the creative flexibility that made SBA workable for complex deals is now constrained in the places buyers needed it most.
The SBA isn't going away. But building an entire acquisition strategy around it, assuming it will always be available, always be accessible, always cover the gap, is a fragile plan.
What the Capital Stack Actually Looks Like
If you want to understand deal financing, you have to understand the capital stack. Not the simplified version. The actual hierarchy of who gets paid, when, and from what.
Peter Baldwin spent the better part of his early career in restructuring and leverage finance, which means he learned to think about capital structure from the bottom up: starting with debt, because debt is what gets paid first.
At the foundation is senior secured debt. This is the first lien position. In a real estate transaction, it's the mortgage. In an SBA deal, it's the government-backed loan. In a corporate transaction, it's a secured credit facility that holds a lien on virtually every asset the company owns: bank accounts, receivables, intellectual property, equipment, everything. The first secured lender is first in line if anything goes wrong.
Below that, you can have second lien secured debt. Below that, unsecured debt. Then you start to see instruments that live in the hybrid territory between debt and equity — structured products that carry features of both and sit above common equity in the recovery waterfall.
And then, at the very top, equity. Equity holders get what's left after everyone else has been paid.
What most founders miss is that this structure doesn't require a bank to exist. The lender in any of these positions can be the seller. A seller note is a secured debt instrument, just like an SBA loan, except that the creditor is the person you bought the business from rather than a third-party financial institution. That distinction changes almost everything about how the deal can be designed.
The Difference Between a Deal That Breathes and One That Doesn't
Peter Baldwin summed up the difference between a traditional SBA-heavy capital stack and a creative deal structure in two words: breathing room.
Option A, the SBA route, looks like this. The majority of the purchase price is paid at close, funded by a ten-year bank loan the buyer is personally liable for, secured by every asset they own, with fixed monthly payments that don't flex regardless of what the business does in any given month. The seller gets their money. The buyer gets the debt.
Option B looks different. A limited cash component at close, typically between ten and twenty percent. A seller note carrying a substantial portion of the remaining balance, with payment terms that can be tied to the actual performance of the business. And an earn-out structure that bridges whatever gap remains between what the buyer is willing to pay today and what the seller believes the business is worth.
The math isn't dramatically different. The risk distribution is.
In the SBA structure, almost all of the performance risk lands on the buyer. Whether the business has a great year or a catastrophic one, the lender doesn't care. The payment is due. In a creative structure, the instruments are designed to absorb variability. If revenue drops, seller note payments can be ratcheted down proportionally. If a big client walks, there's room to breathe rather than a fixed obligation bleeding the business dry while you scramble to replace them.
Peter Baldwin used a deal he worked on in his previous life to illustrate the point: an Italian poultry processor that had a 135 million euro bond due in the same year that bird flu caused Italian consumers to stop eating poultry, crashing their revenue by 70% in three months. The structure that saved it was built around exactly those principles. Variable obligations. Deferred consideration. Economically aligned stakeholders. Breathing room.
Why the Seller Note Is Better Than You Think
For buyers who haven't used seller financing before, it can feel like a workaround. Like you're asking the seller to do something they should be skeptical of.
It's actually the opposite.
Start with information. Nobody knows the business better than the seller. In a conservative lending environment, where a bank might look at an agency's client concentration or founder dependency and walk away, the seller already knows exactly what those risks are and how they've managed them. They can extend credit against an asset they understand in a way no third-party lender ever could.
Then there's incentive alignment. If the seller is carrying a note and they're staying involved in the business through any kind of transition period, they are motivated to see the business perform. When something goes sideways, and something always goes sideways, you can pick up the phone and call someone who has a financial interest in helping you solve the problem. That call to the bank goes very differently.
There's also the rate conversation. Sellers who are used to watching their money sit in a savings account often discover that a seller note at six percent, tied to a business they know and trust, is a better return than anything they were getting before. Less than the SBA would charge the buyer. More than the bank is paying them. And with a level of visibility into the underlying asset that no institutional lender has.
The negotiation dynamic is useful too. When you're asking a seller to take back paper, to carry a note, you're also implicitly asking them whether they believe in the business they're selling you. If they push back hard on the idea that their note might not get paid in full, they're undermining the valuation they just argued for. Peter Baldwin was candid about this: it triangulates the seller into a fundamental catch-22. And the ones who refuse that structure entirely are, in his experience, a diligence red flag worth taking seriously.
How Real Deals Get Funded
The recurring theme across everything Peter and I discussed is one that's easy to say and genuinely hard to internalize.
You don't need more capital to buy a business. You need to understand how to structure a transaction.
The leverage buyout model: borrow a large sum, acquire an asset, use the asset's cash flows to repay the debt, is not new. It dates to the corporate raider era of the 1980s. KKR, Forstmann Little, the deal at the center of Barbarians at the Gate. The technology hasn't fundamentally changed. What has changed is access.
The deal structuring knowledge that PE firms deploy on hundred-million-dollar transactions is entirely applicable to a two-million-dollar agency acquisition. The same principles around capital stack design, deferred consideration, earn-out mechanics, and risk-linked instrument design that Baldwin used on an eighteen-billion-dollar deal are available to a first-time buyer acquiring a small agency in their market.
What separates the founders who use them from the ones who don't isn't intelligence or access. It's the willingness to let go of the mental model that buying a business works like buying a house, and replace it with something more honest: this business should fund its own acquisition, and the structure of the deal should reflect the actual risks in the business.
What's Coming in Episodes Two and Three
This episode was about orientation. About understanding why the dominant financing model for agency acquisitions is under pressure, what the capital stack actually is, and why seller notes are frequently the right tool for deals in this market.
Episodes two and three go further. Peter and I will get into the specific instruments and structures wee use most often in creative deal design, including the hybrid equity instruments Peter Baldwin specifically didn't want to reveal too early in this conversation. Those are the tools that sit between debt and equity in the capital stack, the ones that give sellers something that feels like certainty while giving buyers the flexibility a fixed debt instrument never could.
If you're entering an acquisition strategy now, or if you've been relying on SBA and want to understand what else is available, this is the series worth following to the end.
The Bottom Line
Agency acquisitions don't fail because buyers can't find deals. They fail because buyers couldn't fund them on terms that gave the business room to succeed.
The SBA loan has served a purpose. For some deals, it still will. But the tightening lending environment, the rising default rates in the agency sector, and the inherent mismatch between high fixed-debt obligations and the variable nature of agency cash flows mean that creative deal structuring isn't a workaround anymore.
It's the strategy.
The founders who understand that — who know how to design a capital stack that ties the payment obligations to the actual risk profile of the business they're buying — are the ones who will still be closing deals while everyone else is waiting for the lending market to loosen up again.
That knowledge is available. You don't have to be a private equity CFO to use it. But you do have to be willing to learn the language.
That's what this series is for.
