Buying a Business: Financing Guide

Buying a small business is the most complex financing transaction most owners will ever execute. The structure decisions get made before the LOI is signed; reversing them mid-deal usually kills the close. This guide covers how the actual capital stack assembles, what each piece costs, and the timeline from LOI to funded. For broader context see SBA loans and SBA loans for buying a business.

The Typical Capital Stack

A representative $2M business acquisition:

• SBA 7(a) loan: $1.6M (80% of purchase price). Prime + 2.75% (≈10.25% in 2026). 10-year amortization. ~$22,300/mo P&I.
• Seller note: $200K (10% of purchase price). 6% rate, 5-year term, interest-only years 1-2 (on standby per SBA), then P&I years 3-5.
• Buyer equity: $200K (10% of purchase price). Cash, qualifying gift, or retirement-rollover.
• Total: $2M purchase price + $30-50K closing costs.

Variations: more buyer equity (15-20%) if SBA is restrictive on goodwill; smaller seller note if the seller wants more cash; an SBA 504 leg if real estate is in the deal.

Financing Options

SBA 7(a)

Up to $5M. Best for goodwill-heavy acquisitions (service businesses, professional practices, software companies). 10% borrower equity, 10-year amortization, fixed rate option (prime + 2.5-3%). Standard small-business acquisition loan.

SBA 504

Owner-occupied real estate component. Stack with 7(a) for the goodwill: 7(a) buys the operating business; 504 buys the building. Two SBA loans, one project, layered to optimize rate and structure.

Conventional bank acquisition loan

Used for larger acquisitions ($5M+) or by buyers with strong existing bank relationships. Typically 20-30% down, 5-7 year balloon, lower rate than SBA but tighter credit.

Seller financing

Almost always part of the structure. Reduces buyer equity, signals seller confidence in the business, and bridges valuation gaps. Most SBA-backed acquisitions include 5-25% seller-financed.

Search funds and ETA

For first-time acquirers, search-fund and entrepreneurship-through-acquisition (ETA) structures combine investor equity (10-25%) with SBA debt. Different lender comfort and underwriting; specialty channels exist.

How Seller Notes Actually Work

A seller note is a loan from the seller to the buyer for part of the purchase price, secured by a second lien on the business assets behind the SBA lender. Structure:

• Amount: 5-25% of purchase price typical
• Rate: 6-10% (often higher than SBA but seller comfortable)
• Term: 5 years standard
• Standby: SBA requires the seller note to be on full standby (no payments) for 2 years if it counts toward buyer equity. Some structures use partial standby (interest-only first 2 years).
• Treatment: SBA treats fully-on-standby seller notes as buyer equity for the 10% requirement — can dramatically reduce cash needed at close.

Due Diligence and Timeline

From LOI to funded:

1. LOI signed — Day 0. Outlines deal structure, exclusivity period (usually 60-90 days).
2. SBA application submitted — Day 1-7. Complete package speeds approval.
3. Financial due diligence — Day 7-30. Quality of earnings, customer concentration, working capital adequacy.
4. SBA conditional approval — Day 14-30 (PLP) or Day 30-50 (standard).
5. Third-party reports — Day 21-50. Business valuation, real estate appraisal, environmental Phase 1.
6. Final approval and loan documents — Day 50-75.
7. Closing — Day 60-90. Funding, asset transfer, ownership change.

Common Deal Killers

• Customer concentration — one customer over 25-30% of revenue makes SBA underwriters nervous; over 50% often kills the deal
• Quality of earnings issues — non-recurring revenue, owner-paid personal expenses through the business, unsustainable margins
• Goodwill exceeding asset value — SBA limits how much goodwill can be financed; high-multiple deals stress this
• Owner non-compete — buyer needs a strong non-compete from the seller; weak non-competes block financing
• Environmental issues — Phase 1 turns up contamination concerns on the real estate; can delay or kill

Next Step

Considering a business acquisition? Get matched with an SBA acquisition lender — one application reaches Preferred Lenders for the fastest path to commitment.