Purchasing an existing business involves negotiations between the buyer, the seller, and the lender. In general, failed deals are not a result of poor businesses or sellers with unrealistic expectations. They fail because the buyer is not aware of what the lender requires and the whole agreement crumbles when faced with that issue. Therefore, it is essential to secure financing by knowing what will be carefully evaluated in advance.
Building A Capital Stack That Actually Holds Together
Most acquisitions pool financing sources rather than depend on just one. The best deals strategically stack capital – and it's in executing this skillfully that buyers can free up cash rather than tie it up the day the deal closes.
SBA loans for business acquisition are frequently the linchpin of mid-market transactions because of the longer payback periods (often a decade on deals with substantial goodwill) and lower equity contributions than traditional bank financing. The 7(a) is the most widely used SBA loan program, supporting $27.5 billion on more than 57,000 loans in 2023 (SBA). These numbers underscore how central this form of purchase loan can be to small business ownership transitions.
The SBA typically requires a buyer equity injection of 10% to 25% of the sales price. That's cold, hard cash from the purchaser. One easy way to lower the money you must write a check for is seller financing, which is simply the seller carrying some of the buyer's obligation in the form of a note. For example, a typical 90/10 SBA loan – seller note structure means that the bank lends 90% of the purchase price and the seller carries back a 10% note.
Everything seems straightforward, right?
The Lender's Lens: What Underwriters Really Evaluate
Before you get too wrapped around the axle worrying about interest rates, it's essential to understand the same framework applies to every single acquisition deal out there. A lender is looking at three things: character (or the buyer's background), collateral, and cash flow history of the business.
Character translates to relevant experience. An SBA bank making an acquisition loan for a manufacturing company expects to see that you've operated in or managed that type of environment. It doesn't mean you need experience in that exact industry, but it does mean you need to paint the picture for the underwriter in business plan – not cross your fingers and hope your strong numbers speak for themselves.
Cash flow is applied to the Debt Service Coverage Ratio (DSCR). Here lenders are seeing if the business produces enough net operating income to cover the loan payments with a little extra left over. Most banks are looking for a ratio of 1.25 or above. That is based on historical financials. This is where add-backs come into play. These are the discretionary or one-time expenses that a seller has been able to run through the business that wouldn't work under new ownership that an SBA underwriter isn't going to accept all of – like a personal vehicle or a family member's salary. You're going to have to scrutinize those figures and make sure they're getting added back in during due diligence rather than you simply inheriting the seller's EBITDA presentation.
The Standby Requirement and Why It Changes Your Negotiation
If a seller's note is to be included in the borrower's equity injection, the SBA will require the note to be placed on full standby. This means that the seller will not receive any payments on the note during the standby period, which may be the life of the loan. This may also be required for the guaranty portion if the seller is getting more than 15% of the sales price. Alternatively, the standby period may be defined, e.g. the first three years.
This changes the conversation with the seller entirely. A seller who expected quarterly payments on their carry note will push back when they learn those payments are deferred. The buyer's job is to surface this requirement early – ideally before the Letter of Intent is signed – so it doesn't become a deal-breaker at closing. Transparency at the LOI stage costs nothing. Surprises during underwriting cost deals.
If the seller is unwilling to accept standby terms, the buyer may need to increase their cash injection or find a different structure altogether.
The Documents Lenders Need Before They'll Move Forward
A full loan package probably shouldn't be optional, but even if it were, what buyer wants to compete without their financing lined up? For those who need debt, the first response to the broker should be, "Great. Where do most of your buyers secure financing?" even if you already think you know the answer. The relationship a broker has with a lender can dramatically affect the structure of the loan.
A lender will want to see the last 3 years of your business tax returns, the last 24 months at your current business, and conduct a Q of E if the acquisition is over say, $500,000. Along with these, bring an interminably hopeful and positive 2-year projection demonstrating that you can buy this business and either maintain or grow its revenue stream.
Closing costs – appraisals, environmental reports, legal documentation – should also be budgeted separately. They're real expenses that don't roll neatly into the loan amount, and buyers who don't plan for them find themselves short at the worst possible moment.
Acquisitions fail at the financing stage not because the business was wrong for the buyer, but because the buyer approached funding reactively. Structure the deal before you fall in love with it.
