Buying a Business: How to Finance a Business Acquisition

Buying an existing business can be faster and less risky than starting from scratch. You acquire established customers, trained employees, working systems, and cash flow from day one. But acquisitions require significant capital and careful financing.

Most business acquisitions combine multiple funding sources: SBA loans, seller financing, and buyer equity. Understanding how these pieces fit together is essential to structuring a successful deal.

Why Buy vs. Start

Acquisitions offer advantages over startups:

• Immediate cash flow: Revenue starts day one vs. months/years to build
• Proven concept: The business model works (if it did not, it would be closed)
• Existing customers: No need to build from zero
• Trained staff: Operations continue without hiring from scratch
• Established vendors: Supply chain relationships in place
• Track record: Easier to finance due to historical financials

The tradeoff is higher upfront capital requirement and the need to transition ownership effectively.

How Acquisitions Are Valued

Most small businesses sell for a multiple of earnings, typically Seller Discretionary Earnings (SDE) or EBITDA:

Acquisition Financing Sources

SBA 7(a) Acquisition Loans

SBA 7(a) loans are the primary financing source for business acquisitions under $5 million:

• Maximum: $5 million
• Down payment: 10% minimum (often 15-20% required for acquisitions)
• Rates: Prime + 2.25-4.75%
• Terms: Up to 10 years
• Can finance: Purchase price including goodwill, working capital, real estate
• Requirement: Borrower must have relevant industry experience or strong management plan

Seller Financing

Many acquisitions include seller financing, where the seller acts as a lender for part of the purchase price:

• Typical amount: 10-30% of purchase price
• Rates: 5-8% typical (negotiable)
• Terms: 3-7 years, often with SBA standby requirements
• Why sellers do it: Helps close the deal, shows confidence, tax benefits from installment sale
• Why buyers want it: Reduces equity needed, aligns seller with transition success

Buyer Equity Injection

Buyers must contribute equity (cash or assets) to the purchase:

• SBA minimum: 10% of total project cost
• Typical requirement: 15-25% for acquisitions
• Sources: Personal savings, home equity, retirement accounts (ROBS), investor partners
• Gifts: Family gifts may count if properly documented

Typical Acquisition Deal Structure

Here is how a $1 million business acquisition might be financed:

Due Diligence Essentials

Before finalizing acquisition financing, thorough due diligence protects you:

• Financial verification: Tax returns for 3+ years, reviewed by your accountant
• Revenue quality: Understand customer concentration, contract terms, recurring vs. one-time
• Normalize earnings: Adjust for owner expenses that will not continue under your ownership
• Asset verification: Confirm equipment condition, inventory counts, receivables aging
• Liability discovery: Identify debts, pending litigation, environmental issues
• Employee assessment: Key employees, contracts, benefits obligations
• Customer transition: Will customers stay after ownership change?
• Lease review: Are property leases assignable and favorable?

SBA Acquisition Loan Requirements

SBA lenders evaluate acquisitions carefully. Here is what you need:

• Industry experience: Prior work in the same or related industry (or hiring experienced management)
• Personal credit: 680+ typically required
• Equity injection: 10-25% of total project cost
• Business financials: 3 years of tax returns showing adequate cash flow
• Debt service coverage: Historical cash flow must cover new debt payments by 1.15-1.25x
• Business plan: Your strategy for operating and growing the business
• Purchase agreement: Signed agreement with all terms

Asset Sale vs. Stock Sale

Acquisition structure affects financing and liability:

Most small business acquisitions are asset sales. This lets buyers take the good (customers, equipment, goodwill) while leaving problematic liabilities with the seller.

Timeline and Process

Business acquisitions take time. Here is a typical timeline:

• Month 1-2: Find the business, initial evaluation, letter of intent
• Month 2-3: Due diligence, financial verification, professional inspections
• Month 3-4: Negotiate final terms, sign purchase agreement, apply for financing
• Month 4-5: Lender underwriting, SBA review, appraisal if real estate included
• Month 5-6: Close transaction, transition ownership, training period

Total timeline: 4-6 months is typical; complex deals can take longer.

The Bottom Line

Buying an existing business provides a faster path to ownership than starting from scratch, with proven cash flow and established operations. SBA 7(a) loans are the workhouse financing vehicle, often combined with seller financing and buyer equity.

Success requires thorough due diligence, appropriate industry experience (or a plan to acquire it), and realistic expectations about the transition period. The best acquisitions are ones where the numbers work even if post-sale performance is 10-15% below historical levels.

Take your time, verify everything the seller tells you, and structure the deal so everyone has incentive for a successful transition. When done right, buying a business can be the most efficient way to become a business owner.