How Business Acquisition Financing Works
A business acquisition loan pays for buying an existing company: its goodwill, equipment, inventory, and sometimes its real estate. Lenders underwrite the business's historical cash flow, the buyer's experience and the price, so a well-run business with steady earnings is easier to finance than a startup.
The SBA 7(a) program is the most common way to buy a small business. It finances up to $5 million, often with about 10% down, and spreads payments over up to 10 years (up to 25 years when real estate is part of the deal). Conventional bank loans work for larger deals and stronger buyers, usually with more money down and shorter terms.
Typical Terms
SBA 7(a) rates
Prime + 0-3%
Conventional rates
From 7%
Loan amount
Up to $5M (SBA); larger conventional
Down payment
Often 10% (SBA), 20-30% conventional
Term
Up to 10 years; up to 25 with real estate
Pre-approval decision
24-48 hours
A full SBA acquisition loan usually takes 60 to 90 days from signed letter of intent to closing.
Who It's For
- Buyers purchasing an established small business
- Employees or managers buying the company they work for
- Partners buying out a retiring or departing owner
- Franchisees buying an existing franchise location
- Business owners acquiring a competitor
What You'll Need
- Three years of the business's tax returns and current financial statements
- A signed letter of intent or purchase agreement
- Industry or management experience relevant to the business
- A down payment (equity injection), often 10% for SBA loans
- Personal financial statement and credit report for each owner
- A business valuation, ordered by the lender
How It Works
- 1
Share the deal
Send the listing or letter of intent, the seller's recent tax returns and financials, and your resume.
- 2
Pre-approval in 24-48 hours
We review the cash flow and structure and tell you which SBA and conventional lenders fit the deal.
- 3
Valuation and underwriting
The lender orders a business valuation and reviews the purchase agreement, your experience and your equity.
- 4
Close and transfer ownership
Loan funds go to the seller at closing, alongside your down payment and any seller note.
Using Seller Financing
Many acquisitions include a seller note, where the owner finances part of the price. SBA rules can let a seller note count toward part of your down payment when the seller agrees not to be repaid for a set period (a standby note). Your lender will confirm how the current SBA rules apply to your deal.
What Lenders Look For
Lenders want the business's cash flow to cover the new loan payment with room to spare, usually a debt service coverage ratio of 1.25 or more after paying the new owner a reasonable salary. A clear transition plan, a seller who stays on to help, and experience in the industry all strengthen the application.
- Steady or growing earnings over the last three years
- A purchase price supported by the valuation
- A buyer with relevant experience and some cash in the deal