Loan types
Business acquisition loans, and the price your lender will actually carry
The purchase price is not set by the seller, it is set by coverage. Here is the sources and uses on a $250,000 deal, the DSCR math, and the add-backs that never survive.
A business acquisition loan finances the purchase of an existing company. The thing nobody tells first time buyers is that the lender does not really approve a business, it approves a price. The same company at $250,000 funds easily and at $350,000 gets declined by everyone, and the difference has nothing to do with whether the business is good.
The workhorse for deals under $5,000,000 is the SBA 7(a) loan, typically over ten years for a business without real estate. Conventional bank acquisition financing exists for buyers with strong balance sheets and hard collateral. Seller financing sits inside almost every deal in this size range, and in an SBA structure it can do double duty as part of your required injection.
Sources and uses on a $250,000 acquisition
Start with the total project cost, not the purchase price. Working capital and closing costs are part of the deal and they get financed with it.
| Line | Amount | Note |
|---|---|---|
| Purchase price | $250,000 | What you and the seller agreed to |
| Post closing working capital | $15,000 | Payroll and inventory in the first sixty days, before you understand the cash cycle |
| Closing costs and professional fees | $10,000 | Lender fees, legal, lien searches, and any required valuation |
| Total project cost | $275,000 | The number the injection percentage is calculated against |
| Buyer cash injection | $13,750 | Documented and seasoned in your own account |
| Seller note on full standby | $13,750 | Counts toward the 10 percent when it is on full standby for the life of the loan |
| SBA 7(a) loan | $247,500 | 10.5 percent over 10 years, about $3,340 a month |
The seller note line is the most useful structure in small business acquisition. SBA rules allow a portion of the required equity injection to come from a seller note as long as it is on full standby, meaning no payments of principal or interest for the life of the SBA loan. That cuts the cash you personally have to write in half. It also aligns the seller with your success, which is the point. Read the standby agreement before you negotiate it, because the terms are specific and a partial standby does not count the same way.
Coverage is what sets the price
Annual debt service on $247,500 at 10.5 percent over ten years is about $40,080. Lenders want that covered at roughly 1.25 times by cash flow after you pay yourself, which is the whole test. Suppose the business produces $110,000 of seller's discretionary earnings and you need $60,000 to live on. That leaves $50,000 available for debt service, and $50,000 divided by $40,080 is 1.25. This deal funds, barely.
Now change nothing except the price. At $300,000 the loan grows to $292,500, annual debt service becomes about $47,360, and coverage falls to 1.06. At $350,000 coverage is 0.92, which means the business does not generate enough to pay the loan and you at the same time. Same business, same books, same buyer. The lender is not declining the company, it is declining the arithmetic. If you want a higher price to work, the levers are a bigger down payment, a larger seller note on standby, or a longer term, and nothing else.
Scale it up and the logic is identical. A $1,000,000 purchase with $60,000 of working capital and closing costs is a $1,060,000 project, a $106,000 injection split between your cash and a standby seller note, and a $954,000 loan costing about $154,500 a year. That deal needs roughly $193,000 of cash flow after buyer compensation. At a 3.2 times multiple the implied earnings are $312,500, so after a $100,000 salary you have $212,500 and coverage of about 1.38. See debt service coverage ratio for how lenders calculate the denominator.
What underwriting reads, in order
There is a fixed sequence to how an acquisition file gets read, and knowing it tells you which documents to chase first. The tax returns come before everything, because they are the only numbers the seller signed under penalty of perjury. The interim financials come next, to confirm the current year is not falling apart. Then the add-back schedule, then your resume, then the lease and the licenses, then your personal financial statement. If the first two do not hold up, nothing after them gets read at all.
Notice what is not on that list: the seller's story, the broker's summary, and the projections. Acquisition underwriting is historical. Three years of business tax returns and an interim profit and loss carry almost the whole file, and every add-back has to reconcile to those returns rather than to a spreadsheet somebody built.
The five things that kill acquisition deals
- The owner is the business. If the seller personally holds the relationships, the licenses, or the technical skill, there is nothing to buy. A transition agreement of twelve to twenty four months helps, and lenders increasingly want one in writing.
- Customer concentration. One account above 20 to 25 percent of revenue. Ask what happens to that account when the seller leaves, and get the answer from the customer, not the seller. See concentration risk.
- Books that do not tie. If the profit and loss does not reconcile to the tax returns and the bank deposits, underwriting stops. This is the most common reason a deal that felt done falls apart in week six.
- A lease that does not transfer. A location dependent business with a landlord who will not assign the lease, or who will only assign at a much higher rent, changes the value of what you are buying.
- Licensing and permits that do not follow the entity. Liquor, contractor, medical, and transportation authority all have their own transfer rules and their own calendars. Start those the day you sign the letter of intent.
Stock purchase or asset purchase
This gets decided by lawyers and accountants, but it changes your financing, so it belongs here.
- Asset purchase
- You buy the assets and assume only the liabilities you name. Cleaner for the lender, better for you, and the usual structure in small deals
- Stock purchase
- You buy the entity, and every liability comes with it, known and unknown. Sometimes unavoidable when contracts, licenses, or leases cannot be assigned
- Financing effect
- Lenders prefer asset purchases because the collateral position is cleaner and there is no inherited litigation or tax exposure
- Goodwill
- In an asset deal most of the price is usually goodwill. SBA will finance it, conventional lenders often will not without hard collateral behind it
- Escrow and holdback
- Ten to fifteen percent held back for six to twelve months against undisclosed liabilities. Ask for it in the letter of intent, not at closing
What Exp Capital does with this
Exp Capital Solutions is a broker. We do not fund acquisitions, we do not approve loans, and we do not set purchase prices. What we do is run the coverage math on the deal in front of you before you sign anything, tell you the price the debt will actually carry, and place the file with the SBA and conventional lenders that write your industry and your deal size. Sometimes the honest answer is that the price has to come down or the structure has to change, and sometimes it is that the SBA route is the only one that works. We say both, even when a smaller deal pays us less.