How to Finance a Business Acquisition

The short answer

Most small-business acquisitions are financed with a combination of three sources: a loan (often an SBA 7(a) loan, which the SBA lists for changes of ownership), money from the buyer (equity), and sometimes a seller note, where the seller lets you pay part of the price over time. The lender's main question is whether the business's historical cash flow can pay the new debt and still support you as the owner. Start from the cash flow, not the asking price.

Your financing options

• SBA 7(a) loan — the SBA lists complete or partial changes of ownership as an eligible use, with a $5 million maximum loan. Longer terms keep payments manageable.
• Conventional bank loan — possible with strong collateral and buyer experience; often shorter terms and more equity.
• Seller financing — the seller holds a note for part of the price. It shows the seller believes in the business. SBA rules limit how seller notes can count toward equity, so check the current SOP 50 10.
• Buyer equity — cash, and sometimes retirement-plan structures or investor money, each with its own rules and risks.
• Earnouts — part of the price depends on future performance; useful when buyer and seller disagree on value.
• SBA 504 loan — if the deal includes owner-occupied real estate, sometimes used for the property portion.

Build a sources and uses table

Every acquisition package starts with this table. Uses are everything the deal costs; sources are where every dollar comes from. The two totals must match.

Worked example (hypothetical)

• Purchase price: $1,500,000; working capital: $150,000; closing costs and fees: $60,000
• Total uses: $1,500,000 + $150,000 + $60,000 = $1,710,000
• Buyer equity (10%): $171,000
• Seller note: $150,000 at 6% over 10 years ≈ $1,665/month
• SBA 7(a) loan: $1,710,000 − $171,000 − $150,000 = $1,389,000
• SBA loan at 10.5% over 10 years ≈ $18,742/month
• Total annual debt service: ($18,742 + $1,665) × 12 ≈ $244,890

Will the cash flow support it?

Lenders look at the seller's tax returns, adjust for the seller's personal expenses and owner pay, then subtract a reasonable salary for you. What's left must cover debt service with a cushion.

Coverage check (continuing the example)

• Seller net income: $310,000; add back interest $5,000, depreciation $25,000
• Verified owner add-backs (seller's personal auto, family payroll): $40,000
• Minus a market salary for you: $90,000
• Adjusted cash flow: $310,000 + $5,000 + $25,000 + $40,000 − $90,000 = $290,000
• DSCR = $290,000 ÷ $244,890 ≈ 1.18x — thin for many lenders
• Options: negotiate a larger or partly deferred seller note, more equity, or a lower price

Due diligence lenders expect

• Three years of the seller's business tax returns and interim financials
• A signed letter of intent or purchase agreement
• Customer concentration, key-employee and lease details
• A business valuation where required by the lender or SBA rules
• Your resume showing relevant management experience
• A transition plan: how long the seller stays and what they'll do
• Projections, especially if you plan changes after closing

Mistakes to avoid

• Agreeing on price before checking what the cash flow can finance
• Forgetting working capital — many buyers run short in the first months
• Counting add-backs the seller can't document
• Assuming the seller note doesn't need to be paid from the same cash flow
• Underestimating closing time; acquisitions involve more parties and reports

Getting help

SBA resource partners such as Small Business Development Centers offer free counseling. A financing specialist can build your sources and uses, test coverage under different structures, prepare the lender package and introduce you to lenders that regularly finance acquisitions. Lenders make all credit decisions.

Questions to settle with the seller early

Financing works best when the seller understands what lenders will need. Settle these in the letter of intent, before you spend money on reports.

• Will the seller provide three years of tax returns and monthly financials within a set number of days?
• Will the seller carry a note, and on what terms (rate, term, any standby period)?
• How long will the seller stay to help with the transition?
• Which assets, contracts and employees transfer with the sale?

Common questions

Sources

• SBA: 7(a) loans — uses, maximum amount and eligibility
• SBA: 504 loans — uses, terms and eligibility
• SBA: SOP 50 10 — Lender and Development Company Loan Programs
• SBA: Local assistance and resource partners