Plenty of first-time business buyers have spent decades running operations for someone else. Maybe that’s you, and you’ve decided the next company you run should be your own. Now you’ve found the right business to buy: a profitable HVAC company whose owner is ready to lands at about $2.15 million.
Then comes the question that keeps people up at night. How do you pay for it without draining your retirement account?
Many first-time buyers are surprised to learn that very few acquisitions are paid for with one loan. They’re layered. Buyer cash sits alongside a lender, often the seller, and sometimes a partner. And the way those layers fit together can matter as much as the price itself. A poorly built structure can choke cash flow in year one, right when you need breathing room most.
There’s also a set of SBA rule changes that catches a lot of buyers off guard. We’ll get to it.
Why Buying a Business Isn’t Like Buying a Building
When you buy a building, the lender can point to the bricks. When you buy a business, much of what you pay for is goodwill: the reputation, customer relationships, and systems that make the company run. A lender can’t repossess goodwill. So lenders look at cash flow first and collateral second.
The key measure is DSCR, or debt service coverage ratio. In plain English, it asks one thing: does the business earn enough to cover its loan payments with room to spare? A DSCR of 1.25x means the business brings in $1.25 of cash flow for every $1.00 of loan payments.
It also helps to picture the financing as a building of its own. Lenders call it the capital stack. Senior debt is the ground floor. Subordinated debt fills the middle floors. Equity, meaning your money and any partner’s money, is the top floor. Lower floors carry less risk and cost less; higher floors carry more risk and cost more.
For most acquisitions with a loan need of $5 million or less, that ground floor is an SBA 7(a) loan.
SBA 7(a): The Workhorse of Small Business Acquisitions
The SBA 7(a) program dominates for a simple reason. It allows loans up to $5 million, with up to 10 years to repay the business portion. That longer term keeps monthly payments manageable.
Now, about those rule changes. The SBA’s current rulebook, SOP 50 10 8.1, applies to loans that receive an SBA loan number on or after October 1, 2026. The biggest shift is that every purchase now gets sorted into a category, and the category sets the rules.
First-Time Buyers: The 10% That Won’t Budge
If you’re buying a business you don’t already own or work for, you’re in the Initial Acquisition category. You’ll need equity of at least 10% of total project cost, and the lender can’t reduce it. The deal also has to show at least 1.25x debt service coverage. That coverage is tested on last year’s results or a two-year average. Strong projections can’t make up for a weak track record.
Notice the words “total project cost.” That includes closing costs and working capital, not just the price. In our example, 10% of $2.15 million is $215,000.
A few other guardrails come with the territory:
- A valuation cap. Every SBA-financed change of ownership now needs an independent business valuation, and total debt for the purchase is capped at that value. If the price runs above the appraisal, your equity fills the gap.
- Personal guarantees. Anyone owning 20% or more must personally guarantee the loan. SBA guarantee fees also apply, so ask your lender for current figures.
- A Quality of Earnings report. This independent deep dive into the seller’s numbers is now required once the business price reaches $3 million. Our $2 million example falls below that line.
- A clean break for the seller. The retiring owner has to give up all ownership at closing. They can stay on as a consultant for up to 24 months to help with the handoff.
Already Own a Business? Your Rules May Be Friendlier
If you already own a business and you’re buying one in the same industry, or you’re buying out a partner, different categories apply. A Business Expansion carries a lower 1.15x coverage floor, and the lender may reduce or waive the 10% equity. To qualify, you need to have owned your current business for at least two full fiscal years. An Owner Buyout keeps the 1.25x floor but can also allow flexible equity. If you work for the business you’re buying, you don’t fit the Initial Acquisition definition either, so ask early which category applies. Which bucket you land in is a conversation to have early, because it shapes everything that follows.
This is also where the seller can become your best financing partner.
The Seller Note: When the Owner Becomes Your Lender
A seller note means the seller takes part of the price over time, written up as a promissory note. Lenders like to see one. A seller who’s willing to wait for their money is showing confidence in the business, and it keeps them invested in a smooth handoff.
Under SBA rules, a seller note can cover up to half of your required equity injection. On a standard 10% deal, that’s 5% of project cost. There’s a catch, though. It only counts if it’s on full standby, meaning no principal or interest payments for the entire life of the SBA loan. The old 24-month standby option no longer counts toward equity.
A seller note with regular payments can still be part of the deal. It just doesn’t count as equity. Its payments go into the DSCR test, and it counts toward the debt cap.
Quick math: on our $2.15 million project, a $107,500 full-standby note cuts the buyer’s cash from $215,000 to $107,500. But a retiring owner who needs monthly income may not agree to wait 10 years for payment. If they won’t, plan on bringing the full 10% yourself.
Where Your Share Can Come From
The SBA cares where your equity comes from, not just how much. Savings and other cash you didn’t borrow count in full. So can a personal loan, like a home equity line, if you can repay it from income outside the business. Some buyers use a rollover plan, often called a ROBS, to invest retirement funds in the business without an early-withdrawal penalty. It works, but it puts that money directly at risk, so get tax and legal advice first. Your future salary from the business doesn’t count.
When the Deal Outgrows SBA: Bank and Cash Flow Loans
For larger businesses, or when the loan need tops $5 million, banks and non-bank lenders may lend against EBITDA. That stands for earnings before interest, taxes, depreciation, and amortization. Think of it as a rough measure of the cash the business throws off from operations.
Compared with SBA financing, the trade-offs are real. Expect to bring more equity, accept shorter terms, and live with covenants, which are ongoing performance tests the business has to keep passing. On the plus side, there are no SBA guarantee fees, structures are more flexible, and closings can move faster for experienced buyers.
Filling the Gap: Earnouts, Mezzanine Debt, Partners, and Asset-Based Loans
Sometimes the main layers don’t quite reach the roof.
Earnouts. Part of the price is paid later, only if the business hits agreed targets. They help when the seller values the business above what a bank will support. Define the targets tightly, or the earnout turns into an argument. And know this going in: SBA prohibits seller earnouts in change-of-ownership deals. An LOI with an earnout won’t work with an SBA loan.
Mezzanine debt. This is higher-cost debt that sits between the senior loan and the equity. You’ll mostly find it on larger, conventionally financed deals. Back to our building: the middle floor pays more rent because it’s less protected.
Equity partners. An investor or independent sponsor puts in money in exchange for ownership. With SBA financing, partners at 20% or more must personally guarantee the loan. Money from a passive minority investor can count toward the 10%, but only partway. Under the new rules, standby seller debt and passive investor money together can cover no more than half of the required injection. If a seller note already fills that half, investor money won’t lower your own check. Passive investors also have to hold less than 20%, and they can’t take distributions until the SBA loan is paid off, other than enough to cover their taxes on the business income.
Asset-based loans. These let you borrow against receivables, inventory, or equipment. They suit asset-heavy businesses like manufacturers and distributors.
What If the Real Estate Comes With It?
Sometimes the building is part of the package. You can buy it along with the business, commonly through an SBA 504 loan for the real estate or a 7(a) that includes it. The real estate can usually carry a longer term than the business portion, though the details depend on the program and the mix, so confirm them with your lender. A common alternative is to hold the property in a separate company and lease it to the business.
Putting It Together: A Sample Deal Stack
Here’s how our $2.15 million example might come together. This is illustrative, not a quote, and it assumes a 10% interest rate on a 10-year SBA loan.
- Buyer cash: $107,500 (5%)
- Full-standby seller note: $107,500 (5%)
- SBA 7(a) loan: $1,935,000 (90%)
- Total project: $2,150,000
At those assumptions, the SBA loan payment runs about $25,600 a month, or about $306,900 a year. The standby note adds nothing to payments while the SBA loan is outstanding. To clear 1.25x coverage, the business needs about $383,600 of historical cash flow. That has to be what’s left after paying yourself a fair salary to run the business. Lenders adjust for this, so a seller’s number that includes the owner’s pay often shrinks.
The biggest takeaway is that this structure gets set at the letter of intent (LOI) stage, before most buyers ever talk to a lender.
Why Smart Buyers Bring in a Financing Advisor Before the LOI
That timing is exactly why we like to get involved before the LOI, while a fix is just a better draft.
Our work starts with classifying the deal correctly, before anyone quotes a single number. The category sets the coverage floor and the equity rules, so getting it wrong at the start throws off everything after it. From there, we test historical coverage and add-backs against what a lender will actually document. That’s often a different figure from the one in the seller’s marketing package.
We also know which lenders genuinely like acquisition deals in a given industry and size range. We lean on a large network of lenders to find the right fit. Then we help prepare the deal: historical financials, supportable add-backs, the buyer’s background, and seller-note terms written to meet SBA standby requirements.
Most importantly, we catch problems while terms can still be negotiated. Thin coverage, short equity, a price above valuation, an earnout tucked into the LOI. Each one is far easier to solve on paper than at the closing table.
Let’s Talk Through Your Deal
If you’re eyeing a business, send us the listing or offering memo, the asking price, and your draft LOI if you have one. We’ll tell you which SBA category you likely fall into, how much cash you’d need to bring, and whether the numbers clear coverage. The review is free and there’s no obligation.
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