Buying cash flow, not starting from zero

Acquiring an existing business is the one situation where a lender can underwrite the future with real history: the target's revenue, margins, and customers already exist on paper. That makes acquisitions surprisingly financeable, often more so than expansions of your own company, provided you understand the standard capital stack and what underwriters look for in the business you are buying.

The typical acquisition capital stack

Most small business purchases close with three or four layers:

  • Senior debt, usually SBA 7(a): the largest layer, commonly 60 to 80 percent of the price. The SBA 7(a) program explicitly covers business acquisitions with terms up to 10 years, which keeps payments serviceable out of the acquired cash flow.
  • Seller financing: a note held by the seller, often 10 to 20 percent, repaid over several years. Beyond filling the stack, it keeps the seller invested in a clean transition, and lenders read its presence as the seller's confidence in the business they are handing over.
  • Buyer equity: your down payment. SBA rules require meaningful buyer equity, commonly around 10 percent, and part of it can sometimes be satisfied by a seller note on standby, one that defers payments during the early SBA years.
  • Earnouts: price contingent on future performance. Useful when buyer and seller disagree on trajectory, though SBA deals restrict how earnouts can be structured, so raise them with your lender early.

What lenders scrutinize, in order

  • The target's cash flow. The acquired earnings must cover the entire debt stack with a cushion after paying you a living wage. Underwriters recast the seller's financials, adding back owner perks and one-time costs, to find the true number. Know it before you offer; the sizing logic mirrors how much can I borrow.
  • Your fit. Industry experience or transferable management history materially moves approvals. A buyer with neither pays for it in structure: more equity, more seller note.
  • Customer concentration and transition risk. If the top customer is 40 percent of revenue, or every relationship lives in the seller's head, expect questions, holdbacks, or a longer seller consulting period in the deal.
  • The price itself. Lenders finance valuations, not aspirations. Deals priced far above market multiples for the industry stall in underwriting, and an SBA deal over a threshold requires an independent business valuation anyway.
  • Your own file. The standard package applies, credit, personal financial statement, and the documents in the loan checklist, plus a post-acquisition plan.

Sequencing the deal

Financing should start before the offer, not after. Get pre-qualified with an SBA-experienced lender so you know your realistic price range; structure the letter of intent with the financing contingency and seller-note ask included, it is far harder to add later; run due diligence and underwriting in parallel since they need the same documents; and build the transition plan, including any seller training period, into the purchase agreement because your lender will ask for it. From accepted offer to close, a well-run SBA acquisition typically takes 60 to 90 days.

Mistakes that kill acquisitions

  • Overpaying for potential. You pay for what the business does now; what you will make it do is your upside, not the seller's.
  • Draining working capital to close. The business needs operating cash from day one. Size the loan to include working capital, or keep reserves outside the deal; see what is working capital financing.
  • Skipping the recast. Sellers present optimistic numbers. The add-back analysis is where real cash flow, and the real price, lives.
  • Ignoring the people. Key employees and key customers are the asset. A retention plan is as important as the financing.

Frequently asked questions

How much down payment do I need to buy a business?

Plan on roughly 10 percent minimum for SBA deals, more when the target is riskier or you lack industry background. Seller standby notes can sometimes cover part of the equity requirement.

Can I use the business I am buying as collateral?

Yes, the acquired assets secure the loan, and that is the normal structure. Expect a personal guarantee alongside regardless.

Is seller financing better than a bank loan?

They are complements, not competitors. The strongest small deals pair SBA senior debt with a seller note: the bank provides scale, the seller note provides alignment and fills the gap between price and senior debt.