Business Acquisition Financing: how buyers fund the purchase

Start from cash flow, not purchase price

Acquisition lending is underwritten against the target's seller's discretionary earnings (SDE) or EBITDA, not against your net worth. The governing number is debt service coverage: annual cash flow divided by annual principal and interest. Most acquisition lenders want roughly 1.25x or better after paying you a market salary.

Work the math backwards. If a business throws off $400,000 of SDE and you need to draw $120,000, then $280,000 services debt. At 1.25x coverage that supports roughly $224,000 of annual payments — which at ten-year SBA terms sizes the borrowable amount long before you negotiate a multiple.

• SDE or EBITDA, normalized for owner comp and one-time items
• DSCR after your salary, not before it
• Customer concentration — one client above ~20% of revenue is a pricing issue
• Working capital needs post-close, which are routinely underfunded

SBA 7(a) — the default backbone

The SBA 7(a) program is the most common senior debt for U.S. small-business acquisitions: up to $5 million, ten-year amortization for a goodwill-heavy business, and a buyer equity injection typically around 10% of the project. Part of that injection can be satisfied by a seller note held on full standby, which is why 7(a) and seller financing are usually negotiated as one structure.

SBA 504 is for owner-occupied real estate and heavy equipment rather than goodwill, so buyers acquiring an operating business plus its building often use both — 504 against the property, 7(a) against the business.

• Personal guarantee from any 20%+ owner is standard
• Business valuation by an independent appraiser when goodwill is material
• Life insurance assignment on the key owner is common
• Expect 45–90 days from letter of intent to funding

Seller financing and earnouts

A seller carry-back is the cheapest and fastest capital in most deals, and it aligns incentives: a seller holding paper has a reason to make the transition work. Notes commonly cover 10–25% of price at rates below bank debt, sometimes with interest-only or standby periods that protect early cash flow.

An earnout shifts part of the price onto future performance. It is the right instrument when buyer and seller disagree about sustainability of recent revenue — but it needs a defined metric, a measurement period, and access rights to the books, or it becomes litigation.

• Full standby notes can count toward the SBA equity injection
• Interest-only periods preserve post-close working capital
• Earnouts tie disputed value to a measurable metric
• Consulting or transition agreements keep seller knowledge in the business

Asset-based lending and revolving capital

When the target holds receivables, inventory, or equipment, asset-based lenders will advance against that collateral — typically 70–85% of eligible receivables and a lower percentage of inventory. ABL is usually more expensive than SBA debt but faster, and it flexes with the business rather than amortizing on a fixed schedule.

Most buyers need both: term debt to fund the purchase and a revolver or line to fund payroll and inventory in the first two quarters, when collections lag and the transition costs money.

Stacking the capital

A representative $2,000,000 acquisition: $1,500,000 SBA 7(a), $300,000 seller note on standby, $200,000 buyer injection, plus a $150,000 working capital line drawn as needed. Each layer prices differently and sits in a different position, and the stack only works if the combined payments still clear coverage.

Model the stack before you sign a letter of intent. The financing structure — not the headline multiple — determines whether the deal pays you in year one.

• Senior term debt: lowest rate, tightest covenants, longest process
• Seller paper: cheap, negotiable, subordinated
• Buyer equity: smallest slice, largest negotiating leverage
• Revolver: for working capital only, never for purchase price