Can't select Time Machine disk
This happens with the user does not have permission to write to the share. You can verify this by connecting to the share in the normal way and trying to copy a file to it. The copy will not be allowed, conveyed by the mouse pointer changing to a no-entry sign. To fix, run the Server app and go to the File Sharing section and select your backups share. Then click edit (the pencil) and change "Everyone Else" to Read &amp; Write (see screenshot). Now you will be able to successfully copy a file to the share and also the Time Machine setup problem will be fixed.

You would think that the Permissions for Backup Service ACL (also shown in screenshot) would take into account the users selected in the Time Machine section but it didn't in my case. Perhaps after adding a new user you need to restart File Sharing or reboot the server then maybe it would work without requiring this extra setting but I haven't tried it.