How to Finance a Business Acquisition: SBA Loans, Seller Financing & More (2026)

Key Takeaways

✓ SBA 7(a) loans fund up to $5M at 8-11% interest with only 10-20% down - the most common acquisition financing tool
✓ Blended structures (SBA + seller note + equity) reduce your cash outlay to 10-15% while keeping DSCR above 1.25x
✓ Seller financing isn't just a gap-filler - it signals seller confidence and often earns better SBA terms
✓ Working capital is the hidden deal-killer: budget 10-20% beyond the purchase price or risk post-closing cash crunch
✓ Start financing early - lender pre-qualification should happen before you sign the LOI, not after

Here's the truth about business acquisition financing that most guides won't tell you: the purchase price is not your biggest number. The total capital you need - including working capital, transaction costs, debt service reserves, and transition expenses - routinely exceeds the purchase price by 15-25%.

We've structured financing across a range of acquisitions from $500K to $50M. The deals that close smoothly aren't the ones with the most money - they're the ones with the right financing structure matched to the deal's specific risks, the buyer's profile, and the seller's priorities.

This guide covers every financing option available in 2026, with current rates, specific dollar examples, and the blended structures we recommend for buyers in the $1M-$5M range. Whether you're a buyer new to M&A working with an M&A attorney for the first time or a serial acquirer looking to optimize your capital stack, start here.

The Acquisition Financing Landscape

Business acquisition financing falls into three categories: debt (you borrow and repay with interest), equity (you invest your own capital or take on partners), and hybrid (structures that blend debt, equity, and performance-based payments). Most acquisitions use a combination.

Complete Financing Options Comparison

Option	Coverage	Rate (2026)	Term	Best For
SBA 7(a)	Up to 90% LTV	8-11%	10-25 yrs	Primary financing, most deals
SBA 504	Up to 90% LTV	5-7% (blended)	10-25 yrs	Real estate + equipment heavy
Seller Financing	10-50% of price	6-10%	3-7 yrs	Gap funding, seller alignment
Conventional Bank	70-85% LTV	7-12%	5-10 yrs	Larger deals, fast close needed
ROBS (401k)	Equity - no debt	0% (your funds)	N/A	Reducing down payment gap
Mezzanine Debt	10-20% of deal	12-20%	5-7 yrs	Bridging equity shortfall
Earnout	10-30% of price	N/A (contingent)	1-3 yrs	Bridging valuation gaps
Equipment Finance	80-100% of assets	6-12%	3-7 yrs	Asset-heavy businesses

The Financing Stack: How Capital Layers Work Together

Every acquisition has a capital stack - the ordered layers of financing that fund the deal. Understanding the stack matters because each layer has different cost, risk, and repayment priority. Senior lenders get paid first. Equity owners get paid last. The structure of the stack determines who bears risk, who earns upside, and how much cash you actually need at closing.

The Four Capital Layers Explained

1st
Lien

Senior Debt (SBA or Conventional Bank)

The largest piece of the stack, typically 60-75% of the purchase price. Senior debt has the lowest interest rate because it holds first priority on assets and cash flow. In default, the senior lender is paid before anyone else. For deals under $5M, this is almost always an SBA 7(a) loan. For deals over $5M, a conventional bank or private credit fund fills this role. The senior lender sets the rules for all junior financing - their intercreditor agreements govern what the seller and subordinated lenders can and cannot do.

2nd
Lien

Seller Notes and Subordinated Debt

The seller note sits junior to senior debt. It covers 10-20% of the deal and gives the senior lender comfort that the seller has deferred payment - signaling confidence in the business's ability to service debt. Seller financing is the most common form of subordinated debt in small business acquisitions. Mezzanine debt from a fund occupies this same layer for larger deals, typically carrying warrants or other equity participation rights in exchange for the higher risk.

Roll-
over

Rollover Equity

When a seller retains a minority equity position post-close, that retained interest is called rollover equity. It sits in the equity layer of the stack, meaning it has no guaranteed return - the seller participates in future upside alongside the buyer. Rollover equity is most common in private equity-backed acquisitions but appears in larger independent deals where a seller wants ongoing upside and the buyer wants to reduce cash at closing. It is not debt, carries no payment obligation, and does not affect DSCR calculations.

Buyer
EQ

Buyer Equity (Cash + ROBS)

The buyer's own capital is the bottom of the stack. It absorbs losses first, earns residual upside last, and signals commitment to lenders. Equity can come from personal savings, ROBS (retirement funds), partner contributions, or search fund investor capital. SBA requires a minimum 10-20% equity injection from the buyer and treats ROBS-sourced funds as acceptable equity. The ratio between equity and total deal value - leverage - is the single biggest driver of financial risk in any acquisition.

SBA 7(a) Loans: The Acquisition Workhorse

The SBA 7(a) program is the most popular acquisition financing tool for deals under $5 million - and for good reason. Government backing allows lenders to offer longer terms, lower down payments, and more favorable rates than conventional loans. Here's how it actually works.

$5M

Maximum Loan Amount

Covers purchase price, working capital, equipment, and some closing costs

10-20%

Down Payment Required

Cash, ROBS funds, or combination - must demonstrate "skin in the game"

10-25 yrs

Repayment Terms

10 years for business assets, 25 years if acquisition includes real estate

1.25x

DSCR Requirement

Business must generate $1.25 in net income for every $1.00 in debt payments

SBA 7(a) Interest Rate Caps (2026)

Loan Amount	Variable Rate Cap	Estimated Total Rate*	Monthly Payment / $1M
$0 - $25,000	Prime + 4.25%	~10.75%	N/A
$25,001 - $50,000	Prime + 3.25%	~9.75%	N/A
$50,001 - $250,000	Prime + 2.75%	~9.25%	~$12,750
$250,001 - $5,000,000	Prime + 2.25%	~8.75%	~$11,400

*Based on prime rate of ~6.50% as of early 2026. Rates are variable and adjust with prime.

SBA 7(a) Eligibility Requirements

Buyer Requirements

• U.S. citizen or lawful permanent resident
• Personal credit score 680+ (650 with compensating factors)
• 10-20% equity injection (cash or equivalent)
• Relevant industry experience or management plan
• Unlimited personal guarantee required
• No recent bankruptcies or defaults

Business Requirements

• For-profit, operating U.S. business
• Meets SBA size standards for the industry
• DSCR of 1.25x or higher on historical cash flow
• Not in a restricted industry (real estate investment, lending, etc.)
• Complete financial records (3 years preferred)
• No outstanding government debt

SBA Size Standards and Affiliation Rules

To qualify for an SBA loan, the target business must be a "small business" as defined by the SBA's size standards. These standards vary by industry and are measured either by average annual revenue or average number of employees over the prior three fiscal years. For most service businesses, the revenue threshold ranges from $8M to $47M. For manufacturing businesses, the standard is typically 500-1,500 employees. Industries with higher capital requirements - healthcare, professional services, technology - may have higher thresholds. The SBA loan legal process involves verifying size eligibility early, before the full application is submitted.

SBA Affiliation Rules: The Hidden Disqualifier

The SBA's affiliation rules aggregate the revenues or employee counts of related businesses when determining size eligibility. If you already own a business and are acquiring another, both are combined. If you have investors with ownership or control rights in multiple portfolio companies, the SBA may aggregate all of them. Affiliation can disqualify an otherwise eligible deal if the combined entities exceed the size standard.

Common affiliation triggers:

Buyer or key investor holds equity in multiple businesses in the same industry
A common investor controls or influences both the buyer and target
Search fund investors with board seats across multiple portfolio companies
Family relationships that give one person effective control over multiple entities

Work with an acquisition attorney to map the affiliation analysis before submitting an SBA application. Discovering an affiliation issue mid-underwriting can collapse the timeline and, in some cases, the deal itself.

SBA Loan Timeline: Application to Funding

WK 1-2

Pre-Qualification & Document Gathering

Submit personal financial statement, resume, business plan, and 3 years of target business tax returns. Lender provides preliminary approval and terms.

WK 3-6

Underwriting & Analysis

Lender reviews financials in detail, orders appraisals, verifies cash flow projections, and analyzes DSCR. Expect follow-up document requests. This is where most delays happen.

WK 7-8

SBA Authorization

Lender submits package to SBA for guarantee approval. Preferred lenders can approve in-house, saving 2-3 weeks. Standard processing: 5-10 business days.

WK 9-10

Closing & Funding

Loan documents prepared, closing coordinated with purchase agreement closing. Funds disbursed at or immediately after closing. Your M&A attorney coordinates the simultaneous close.

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Attorney Tip: Start Financing Before the LOI

The single biggest financing mistake we see is buyers who negotiate and sign the LOI, then start looking for a lender. By then, you've committed to a timeline that may not match reality. Get pre-qualified with an SBA preferred lender before you start making offers. You'll negotiate from a position of strength, and sellers take pre-approved buyers more seriously.

Seller Financing: The Most Underrated Tool

Seller financing is when the seller agrees to receive a portion of the purchase price over time - essentially becoming your lender for 10-30% of the deal. Most buyers think of it as a last resort. In our experience, it should be your first conversation.

Why Buyers Want It

→ Reduces cash outlay - less equity injection required at closing
→ No third-party approval - negotiated directly with seller
→ Flexible terms - interest-only periods, balloon payments, performance triggers
→ Seller alignment - seller stays invested in the business's success

Why Sellers Accept It

→ Higher total price - sellers often get 5-15% more in exchange for terms
→ Tax deferral - installment sale treatment spreads capital gains over multiple years
→ Interest income - 6-10% return on a secured note beats most investments
→ Faster close - seller note can close regardless of bank timeline

Typical Seller Financing Terms

Term	Typical Range	What to Negotiate
Amount	10-30% of purchase price	Higher % = lower cash at closing, but more debt service
Interest Rate	6-10%	Below SBA rate is ideal; seller still earns above-market returns
Term	3-7 years	Match to your projected payback period, not seller preference
Payment Structure	Monthly/quarterly + balloon	Interest-only for Year 1 preserves cash during transition
Subordination	Subordinated to SBA debt	Required by most SBA lenders - seller note comes second in priority
Standby Period	6-24 months (SBA requirement)	SBA often requires seller note payments to be deferred; confirm with lender

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Attorney Tip: The Seller Note as Insurance Policy

We negotiate an offset right into every seller note: if the seller's representations and warranties prove false, the buyer can offset indemnification claims against remaining seller note payments. This turns the seller note into a built-in escrow - and gives the seller a strong incentive to be truthful during due diligence.

ROBS: Using Retirement Funds to Buy a Business

A Rollover for Business Startups (ROBS) lets you use 401(k) or IRA funds as equity to acquire a business - without early withdrawal penalties or taxes. It's not a loan. You're investing your retirement savings directly into the business.

How ROBS Works (4 Steps)

Form a C-Corp

New C-corporation is created to acquire the target business

Create 401(k) Plan

C-corp establishes a new 401(k) plan that allows company stock investment

Roll Over Funds

Your existing retirement funds roll tax-free into the new 401(k)

Buy Company Stock

New 401(k) purchases C-corp stock; corp uses funds to acquire the business

ROBS Advantages

• No debt = no monthly payments on this portion
• No early withdrawal penalty or taxes
• Can fund up to 100% of equity injection
• Increases your total purchasing power
• Combines well with SBA loans

ROBS Risks

• You're betting your retirement on the business
• Must be structured as C-corp (double taxation)
• Ongoing compliance costs ($1,500-$3,000/yr)
• IRS scrutiny - must follow ERISA rules precisely
• If the business fails, retirement funds are gone

Other Financing Options

Mezzanine Debt

Subordinated debt that fills the gap between senior bank debt and your equity. Rates are steep (12-20%), but it bridges equity shortfalls for buyers who can't put 20-25% down.

12-20%

Interest Rate

5-7 yrs

Typical Term

10-20%

% of Deal

Best for: Buyers with strong cash flow projections but limited equity. Often includes warrants (equity kickers) that give the lender upside if the business grows.

SBA 504 Loans

Designed for fixed asset acquisitions - real estate, equipment, and machinery. Lower blended rates than 7(a) because the CDC/SBA portion is fixed-rate. The three-party structure means longer processing.

50/40/10

Bank / SBA / Buyer Split

5-7%

Blended Rate

10-25 yrs

Term

Best for: Acquisitions that include significant real estate or heavy equipment. The lower blended rate can save tens of thousands over the loan life.

Conventional Bank Loans

No SBA guarantee means faster processing (2-4 weeks vs. 8-10 weeks) but higher down payments (15-30%) and shorter terms (5-10 years). Best for larger deals ($5M+) or buyers with strong banking relationships.

7-12% • 5-10 yrs • 70-85% LTV

Equipment Financing

Asset-based loans secured by the equipment itself. Fast approval based on collateral value, not buyer financials. Works well as a supplement to the primary acquisition loan for asset-heavy businesses.

6-12% • 3-7 yrs • 80-100% of asset value

Conventional Bank Acquisition Loans

When a deal cannot use SBA financing - either because the purchase price exceeds $5M, the buyer already has an outstanding SBA loan, or speed is the primary constraint - conventional bank loans fill the role. Unlike SBA loans, conventional bank financing carries no government guarantee, which means lenders apply stricter underwriting standards but can move significantly faster and impose fewer structural requirements.

Conventional lenders typically require 15-30% equity injection, a credit score of 700 or higher, at least three years of audited or reviewed financials from the target, and a DSCR of 1.25x-1.50x. Terms are shorter (5-10 years vs. 10-25 years for SBA) and rates are generally comparable or slightly higher, though strong borrowers with existing banking relationships can negotiate competitive pricing. The tradeoff is speed: a well-packaged conventional loan can close in 20-30 days versus 60-90 days for SBA. In competitive acquisitions where the seller has multiple offers, conventional financing often wins on closing certainty. See the M&A deal structures guide for how financing type interacts with deal structure choices.

The Search Fund Financing Model

A search fund is a structure in which an individual (the searcher) raises capital from investors to fund a multi-year search for a business to acquire. Once a target is identified, the searcher raises additional capital from the same or new investors to fund the acquisition itself. The resulting financing structure is distinct from a simple individual buyer using SBA financing.

How Search Fund Acquisitions Are Typically Financed

Senior debt: SBA 7(a) or conventional bank loan, typically 50-70% of the purchase price. Search fund investors' equity contribution satisfies the bank's equity injection requirement.

Seller note: 10-20% of the purchase price, subordinated to senior debt. Search fund lenders and investors are familiar with seller note structures and often require them as a condition of providing equity capital.

Investor equity: The search fund's backers contribute equity at acquisition, typically in exchange for preferred equity with a stated return and conversion rights. The searcher typically receives a carried interest (upside participation) in exchange for managing the acquisition and the business post-close.

Searcher equity: The searcher contributes a nominal amount of personal capital and earns equity through performance - vesting over time as the business grows. This structure rewards operational success rather than requiring large personal capital at close.

Key distinction: Search funds raise equity from a defined group of investors who understand the search model. This differs from a private equity fund - search fund investors are typically individuals (HNW or experienced operators) backing a specific searcher, not a blind pool. The governance and investor-searcher relationship are governed by term sheets and investor agreements that an M&A attorney should draft or review at the acquisition stage.

Mezzanine and Unitranche Financing for Middle-Market Deals

For acquisitions above $5M - where SBA financing is unavailable and conventional bank debt alone does not cover the full purchase price - mezzanine debt and unitranche structures become relevant tools in the capital stack. These instruments sit between senior bank debt and equity, filling the gap that would otherwise require the buyer to contribute more personal capital.

Mezzanine Debt

True subordinated debt with a separate lender who sits junior to senior debt. Mezzanine lenders charge higher rates (12-20%) to compensate for their junior position and typically receive warrants - the right to purchase equity in the company at a fixed price. This gives the mezzanine lender equity-like upside if the business grows in value.

Rate: 12-20% (often PIK - payment in kind - accruing until maturity)
Collateral: Second lien on assets, personal guarantees may apply
Intercreditor: Governed by agreement with senior lender
Common in: Lower middle-market deals $5M-$25M

Unitranche Financing

A unitranche loan combines senior and subordinated debt into a single loan from a single lender (or a club of lenders acting as one). The borrower sees one rate, one set of covenants, and one lender relationship - simplifying the capital structure significantly. Unitranche is common in the $10M-$50M deal range from private credit funds.

Rate: 10-15% (blended, reflecting the combined senior/junior risk)
Structure: Single credit agreement, no intercreditor complexity
Speed: Faster than multi-lender structures
Common in: PE-backed acquisitions, middle-market deals

Private Equity Sponsor Financing

When a private equity firm acquires a business, the financing structure differs fundamentally from an individual buyer using SBA financing. PE-backed acquisitions rely on leverage from institutional lenders - banks, private credit funds, or capital markets - paired with equity contributed by the PE fund itself. The PE firm's limited partners (LPs) are the ultimate equity source, investing through the fund vehicle.

A typical PE acquisition in the lower middle market ($10M-$50M) uses 3-4x EBITDA in senior debt (bank or unitranche), sometimes 1-2x in subordinated debt (mezzanine or seller note), and the remaining value covered by PE fund equity. The seller may retain rollover equity of 15-30%, aligning their interests with the new ownership. The combined structure often achieves 5-7x total leverage on EBITDA, compared to the 3-4x typical of an SBA deal.

PE Deal vs. Individual Buyer: Financing Comparison

Factor	Individual / Search Fund	PE Sponsor
Primary debt	SBA 7(a) or conventional bank	Bank or private credit fund
Equity source	Buyer cash, ROBS, search fund investors	PE fund (LP capital)
Leverage ratio	3-4x EBITDA	4-7x EBITDA
Personal guarantee	Required (SBA and most banks)	Generally no personal recourse
Seller rollover	Uncommon	Common (15-30%)
Close timeline	45-90 days (SBA)	30-60 days

Quality of Earnings Reports and Lender Requirements

A Quality of Earnings (QoE) report is a financial analysis of the target business's historical earnings, performed by an independent accounting firm. It reconciles reported revenue and EBITDA to a normalized, transaction-appropriate figure by identifying non-recurring items, owner-related expenses, and revenue quality issues. For most acquisitions above $1M, a QoE report has moved from optional to expected.

What a QoE Report Covers

Earnings Normalization

- Removal of non-recurring revenue and expense items
- Adjustment for above- or below-market owner compensation
- Identification of personal expenses run through the business
- Normalization of one-time professional fees (legal, consulting)

Revenue Quality Analysis

- Customer concentration (top 5, top 10 customer revenue %)
- Recurring vs. one-time revenue mix
- Contract backlog and renewal rates
- Trend analysis: are revenues growing, flat, or declining?

Working Capital Analysis

- Normal working capital level (peg for purchase agreement)
- Accounts receivable aging and collectability
- Inventory valuation and obsolescence risk
- Accounts payable timing and deferred liabilities

Lender Requirements

- Many SBA lenders now require QoE for loans over $1M
- Conventional lenders often require it for loans over $2M
- QoE-confirmed EBITDA is used as the basis for DSCR calculation
- Lender may accept the buyer's QoE or commission their own

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Attorney Tip: QoE Findings Belong in the Purchase Agreement

The QoE report is a due diligence tool, but its findings must translate into deal terms to have legal effect. If the QoE reveals a one-time customer that inflated revenue by 15%, that needs to be reflected in a price adjustment or a specific representation in the purchase agreement. QoE findings that are noted but not contractually addressed leave the buyer exposed. We use QoE results to sharpen the rep and warranty schedule, the indemnification provisions, and the working capital peg.

How the LOI Signals the Financing Plan

The Letter of Intent (LOI) is more than a price agreement. It is the first document that signals to the seller - and to the lender - exactly how the deal will be financed. A well-structured LOI describes the proposed purchase price, the equity contribution, the intended debt structure, and the role (if any) of seller financing. A poorly structured LOI creates ambiguity that delays due diligence, complicates lender underwriting, and gives the seller grounds to negotiate harder post-signing.

Financing Provisions That Belong in Every LOI

Purchase price and payment structure: How much is paid at closing, how much via seller note, how much via earnout. This directly determines the seller's net at closing and their tax treatment.

Financing contingency: The right to exit the deal if the buyer cannot secure acceptable financing within a defined period. This is non-negotiable protection for the buyer - without it, a failed loan approval can cost the buyer their deposit and expose them to liability.

Seller financing terms (if proposed): Interest rate range, repayment term, subordination language, and standby period. Establishing these in the LOI prevents renegotiation later when the seller has leverage.

Working capital definition: A defined working capital peg and adjustment mechanism. Without this, the seller can drain working capital before close, leaving the buyer with a cash-short business and no contractual remedy.

Exclusivity period: Prevents the seller from marketing to other buyers while you complete due diligence and finalize financing. Standard exclusivity is 45-90 days for SBA-financed deals. This aligns with realistic loan processing timelines.

Personal Guarantees and Collateral

Personal guarantees are a standard feature of acquisition lending for individual buyers. When you guarantee an SBA or bank loan, you are pledging your personal creditworthiness and assets as additional collateral behind the business assets. If the business cannot service the debt, the lender can pursue your personal assets - including your home, savings accounts, and investment portfolios - to satisfy the obligation.

SBA Personal Guarantee Requirements

Who must guarantee: All owners of 20% or more of the borrowing entity must provide unlimited personal guarantees.
Scope: Unlimited - covers the full loan balance plus interest and fees.
Collateral: SBA requires lenders to take a lien on all available collateral - business and personal - before declining a loan for insufficient collateral.
Home equity: If a principal's home has equity, the SBA lender may require a lien on the residence as additional collateral.

Managing Guarantee Exposure

Right-size the debt: Structure the deal so the business can service all debt with 20-30% revenue buffer. A business that needs perfect execution to hit DSCR minimums is overleveraged.
Negotiate guarantee carve-outs: On conventional loans (not SBA), limited guarantees - capped at a fixed dollar amount or duration - are sometimes negotiable.
Use entity structure: Ensure the acquisition entity is properly structured to limit guarantee exposure to the intended assets. An attorney should review the entity structure and guarantee terms together.
Life and disability insurance: Many lenders require key-person life insurance assigned to the lender. This protects both the lender and your estate if something happens to you as the guarantor.

Working Capital Loans vs. Acquisition Loans

Buyers routinely confuse working capital needs with acquisition financing - and the distinction matters because lenders treat them differently. An acquisition loan funds the purchase of business assets or equity. A working capital loan funds the day-to-day operations of the business post-close: payroll, inventory, receivables float, and operating expenses during the transition period.

Acquisition Loan vs. Working Capital Loan: Key Differences

Factor	Acquisition Loan	Working Capital Loan
Purpose	Fund the purchase price of the business	Fund ongoing operations post-close
Term	10-25 years	12 months to 5 years (revolving or term)
Collateral	Business assets, personal guarantee	Accounts receivable, inventory, blanket lien
Structure	Term loan, single disbursement at close	Revolving line of credit or short-term term loan
SBA eligibility	SBA 7(a) covers both purchase price and working capital (combined)	Standalone SBA working capital loans are available post-close
When to use	At or before closing to fund the purchase	Post-close, when business cash flow is building

The practical implication: when structuring an SBA 7(a) acquisition loan, you can include working capital in the same loan - the SBA allows the loan proceeds to cover the purchase price, working capital needs, and some transaction costs in a single note. This is the preferred approach because it locks in the working capital at the acquisition's favorable rate and term rather than forcing the buyer to find a separate facility post-close. Request working capital as part of the initial loan package, not as an afterthought. Read more about budgeting total capital needs in the complete guide to buying a business.

How Financing Affects Deal Structure and Close Timing

Financing is not a separate track from deal structuring - it shapes every material term of the transaction. The financing source determines the permissible deal structure, the acceptable purchase price allocation, and the realistic closing timeline. Understanding these dependencies before you negotiate prevents conflicts that derail deals in the final stretch.

Asset Purchase vs. Stock Purchase: Lender Preferences

SBA lenders strongly prefer asset purchases because the buyer's new entity takes clean ownership of specific assets without inheriting unknown liabilities. Stock purchases - where the buyer acquires the existing entity and all its history - are allowed under SBA but require more due diligence and often result in a higher lender-required equity injection. Conventional bank lenders are generally more flexible on structure. The deal structure decision must be made with the lender's preferences in mind, not only tax and liability considerations.

Purchase Price Allocation and Depreciation

In an asset purchase, the purchase price must be allocated across the business's assets in IRS Form 8594. Lenders review this allocation because it determines the collateral base - how much of the purchase price is backed by hard assets (equipment, real estate) vs. soft assets (goodwill, customer relationships). Higher hard asset allocation = better lender comfort. Higher goodwill allocation = higher perceived risk for the lender, since goodwill cannot be liquidated if the business fails. The business valuation and asset allocation should be planned together with the financing structure. Understanding SDE vs. EBITDA and how each is treated in lender underwriting is essential here.

Closing Timeline Management

SBA loans take 45-90 days from application to close. Conventional bank loans take 20-40 days. Seller-only financed deals can close in as little as 2-3 weeks. The LOI exclusivity period must match the realistic financing timeline - an SBA-financed deal that signs an LOI with a 30-day exclusivity period is structurally set up to fail. Build in 75-90 days for SBA deals. Coordinate the lender's closing checklist, the purchase agreement's closing conditions, and the seller's transition timeline simultaneously - not sequentially. A deal that requires the seller to introduce the buyer to key customers before close adds time that must be factored into the financing timeline.

Earnout Provisions and Lender Acceptance

Earnouts defer a portion of the purchase price to post-close performance. Lenders generally do not count contingent earnout payments as debt service, which makes them attractive for improving DSCR calculations. However, lenders scrutinize earnout structures to ensure they do not create a future payment obligation that would impair the business's cash flow. Earnout terms should be reviewed by your attorney and disclosed to your lender early in the underwriting process. A poorly structured earnout can create an off-balance-sheet liability that a lender discovers during final review - collapsing the deal days before closing. The seller's perspective on earnout timing and how it interacts with tax treatment is a useful reference when negotiating these provisions.

Financing the Deal Is Only Half the Battle

Getting the money is step one. Structuring the deal to protect your investment is step two. Our experienced M&A team knows which financing structures work and which ones create problems at closing.

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Blended Financing: How Real Deals Get Done

Nearly every acquisition in the $1M-$5M range uses a blended financing structure - combining 2-3 sources to minimize cash outlay, manage risk, and satisfy lender requirements. Here's how the math works at different deal sizes.

Example 1: $1.5M Service Business Acquisition

HVAC company, $350K adjusted EBITDA, asset purchase

Source	Amount	% of Deal	Terms	Annual Cost
SBA 7(a) Loan	$1,050,000	70%	10 yr, 8.75%	$157,500
Seller Note	$225,000	15%	5 yr, 7%, 12-mo standby	$53,400
Buyer Equity	$225,000	15%	Cash + ROBS	-
Total	$1,500,000	100%		$210,900

DSCR Check: $350K EBITDA ÷ $210,900 total debt service = 1.66x (well above 1.25x minimum)

Year 1 note: Seller note on 12-month standby per SBA requirement - only SBA payment in Year 1 ($157,500). DSCR in Year 1 = 2.24x.

Example 2: $3.2M Manufacturing Business Acquisition

Specialty manufacturer, $800K adjusted EBITDA, $1.2M in equipment, real estate included

Source	Amount	% of Deal	Terms	Annual Cost
SBA 7(a) Loan	$2,080,000	65%	10 yr, 8.75%	$311,600
Seller Note	$480,000	15%	5 yr, 7%, 12-mo standby	$114,000
Buyer Equity	$480,000	15%	Cash ($280K) + ROBS ($200K)	-
Equipment Line	$160,000	5%	5 yr, 8%, secured by equipment	$38,900
Total	$3,200,000	100%		$464,500

DSCR Check: $800K EBITDA ÷ $464,500 total debt service = 1.72x

Buyer's total cash at closing: $280K equity + ~$80K transaction costs + $100K working capital reserve = $460K out of pocket

Example 3: $5M Professional Services Acquisition

IT managed services provider, $1.3M adjusted EBITDA, minimal hard assets, key-employee retention critical

Source	Amount	% of Deal	Terms	Annual Cost
SBA 7(a) Loan	$3,250,000	65%	10 yr, 8.75%	$487,100
Seller Note	$500,000	10%	5 yr, 7%, 12-mo standby	$118,800
Earnout	$500,000	10%	2 yr, revenue-based triggers	Contingent
Buyer Equity	$750,000	15%	Cash ($500K) + ROBS ($250K)	-
Total	$5,000,000	100%		$605,900*

DSCR Check: $1.3M EBITDA ÷ $605,900 fixed debt service = 2.15x

Strategy note: The $500K earnout bridges the valuation gap (seller wanted $5.5M). Revenue triggers ensure buyer only pays full price if the business performs. The earnout is not included in DSCR calculations by most lenders.

*Excludes contingent earnout payments.

The Real Number: Total Capital Beyond the Purchase Price

The purchase price is the headline number. But the total capital requirement - the real number you need to fund - is 15-25% higher. Here's where that money goes.

Total Capital Requirements (Using $3M Acquisition Example)

Category	Items	Typical Range	Our Example
Purchase Price	Agreed deal value	-	$3,000,000
Working Capital	Inventory, AR, operating cash reserves	10-20% of purchase price	$375,000
Transaction Costs	Legal, accounting, QoE, broker fees	5-8% of deal value	$195,000
Financing Costs	SBA guarantee fee, lender points, appraisals	2-3% of loan amount	$52,500
Transition Reserve	3-6 months debt service buffer	Varies by risk	$75,000
Total Capital Required		115-131% of purchase price	$3,697,500

That's 23% more than the purchase price. Buyers who only plan for $3M are short $697,500. This is the #1 reason deals fall apart after closing - not before.

Tax Implications by Financing Structure

How you finance the acquisition directly affects your tax position - both at closing and for years afterward. Here's what most guides miss.

Financing Source	Tax Benefit to Buyer	Tax Impact on Seller	Key Consideration
SBA / Bank Loan	Interest payments are tax-deductible; asset step-up creates depreciation/amortization deductions	No direct impact - seller receives full payment at closing	Asset purchase + debt financing maximizes buyer's tax shield
Seller Financing	Interest payments deductible; same as bank debt from buyer's perspective	Installment sale treatment - capital gains spread over payment years	Seller saves significantly on taxes vs. lump sum; use this as negotiation leverage
ROBS	No debt = no interest deduction; C-corp structure may create double taxation	No impact on seller	Reduced tax efficiency offset by zero debt service - net effect depends on cash flow
Earnout	Payments deductible when made (if structured as compensation); amortizable if goodwill	Taxed as received - may be ordinary income vs. capital gains depending on structure	Tax characterization must be defined in the purchase agreement - consult CPA + attorney

7 Financing Mistakes That Kill Deals

Starting the Financing Process After the LOI

You've committed to a 60-day due diligence timeline, but SBA loans take 45-90 days. Now you're scrambling, the seller is nervous, and you're negotiating from a position of weakness. Fix: Get pre-qualified with 2-3 lenders before submitting your first offer.

Budgeting Only the Purchase Price

The purchase price is 75-85% of your total capital need. Forgetting working capital ($300K-$600K for a $3M deal), transaction costs ($150K-$250K), and transition reserves puts you underwater 90 days after closing. Fix: Budget 120-130% of the purchase price from day one.

Trusting Seller Add-Backs Without Verification

Sellers inflate EBITDA with add-backs: owner salary above market, one-time expenses, personal expenses through the business. Lenders scrutinize these heavily. If your DSCR depends on add-backs that don't survive a Quality of Earnings analysis, the loan gets denied. Fix: Commission an independent QoE report before finalizing your offer.

Ignoring the Personal Guarantee

SBA and most bank loans require unlimited personal guarantees. Your home, savings, and personal assets are on the line. Buyers who overleverge - putting 90% debt on a business with thin margins - risk everything. Fix: Limit total debt to a level where you can survive a 20-30% revenue decline. Discuss guarantee limitations with your attorney.

Mismatching Financing to Deal Structure

Using a 5-year conventional loan for a business that needs 10 years to generate the returns, or choosing an SBA 504 for a deal with no real estate. Wrong tool, wrong outcome. Fix: Match the financing term to the asset's useful life and the business's cash flow trajectory.

Not Negotiating Seller Financing Terms

Buyers accept whatever the seller proposes. But seller note terms - interest rate, standby period, subordination, offset rights - are all negotiable. An extra 2% interest on a $500K seller note costs $50,000 over 5 years. Fix: Your M&A attorney should negotiate seller note terms alongside the purchase agreement.

Skipping the Working Capital Adjustment

If the seller runs down inventory, collects all receivables, and delays payables before closing, you inherit a cash-starved business. Without a working capital adjustment in the purchase agreement, you eat the difference. Fix: Define a target working capital peg in the LOI and adjust the purchase price at closing based on actual vs. target.

Case Study: How a Buyer Financed Their First $2.4M Acquisition

$2.4M

Purchase Price

$620K

Adjusted EBITDA

$310K

Buyer's Total Cash

The Situation

A corporate executive with 15 years of operations experience wanted to acquire a commercial cleaning company. The business was profitable ($620K EBITDA) with 47 recurring contracts and a strong management team. The buyer had $310K in available cash plus $180K in a 401(k).

The Challenge

Standard SBA financing would require 15-20% equity ($360K-$480K). The buyer only had $310K in liquid cash - short of even the minimum. The seller was also negotiating with a private equity firm, so the deal needed to move quickly.

The Solution: 4-Source Blended Structure

SBA 7(a) Loan	$1,680,000 (70%)	10 yr, 8.75%, $252K/yr debt service
Seller Note	$240,000 (10%)	5 yr, 7%, 12-mo standby, subordinated
ROBS (401k rollover)	$180,000 (7.5%)	Tax-free rollover into C-corp equity
Cash Equity	$300,000 (12.5%)	Savings + small personal loan from family

The Outcome

Year 1 Results

• DSCR: 2.07x (only SBA payment due in Year 1)
• Won 8 new contracts, grew revenue 12%
• Built $150K cash reserve before seller note payments began

Year 3 Results

• Paid off seller note early (Year 3 instead of Year 5)
• Revenue up 34%, EBITDA at $830K
• Converted C-corp to S-corp after ROBS compliance period

Attorney's note: The seller note included an offset provision tied to the representations and warranties. When a minor environmental issue surfaced post-closing ($28K remediation), the buyer offset it against the seller note balance instead of initiating a formal indemnification claim - saving both parties legal fees and preserving the relationship.

How to Calculate Your DSCR (With Example)

Debt Service Coverage Ratio is the single most important number in acquisition financing. If your DSCR doesn't work, no lender will fund the deal. Here's how to calculate it - and how lenders actually evaluate it.

DSCR Formula

DSCR = Net Operating Income ÷ Total Annual Debt Service

Net Operating Income (NOI)

= Revenue
− Operating expenses
− Owner's market-rate salary
+ Legitimate add-backs (one-time, non-recurring)
= Adjusted EBITDA

Total Annual Debt Service

+ SBA/bank loan annual payments
+ Seller note annual payments
+ Equipment financing payments
+ Any other debt obligations
= Total debt service

Example: $2M Acquisition

Adjusted EBITDA: $550,000

SBA loan payments ($1.4M, 10 yr, 8.75%): $210,000/yr

Seller note ($200K, 5 yr, 7%): $47,500/yr

Total annual debt service: $257,500

DSCR = $550,000 ÷ $257,500 = 2.14x ✓

DSCR Red Flags Lenders Watch For

Below 1.25x = Denial

• DSCR below 1.0x means the business can't cover its debt
• Most lenders want 1.25x-1.50x minimum
• Conservative lenders require 1.50x+ for new buyers

Common DSCR Traps

• Add-backs that won't survive QoE analysis
• Forgetting to include ALL debt payments
• Not adjusting for owner replacement salary
• Using best-year EBITDA instead of 3-year average

Which Financing Structure Is Right for Your Deal?

If you have strong credit (700+) and 20%+ cash available:

Go SBA 7(a) + 10-15% seller note. You'll get the best rates, longest terms, and fastest approval. The seller note reduces your equity injection and creates alignment. This covers 80% of successful acquisitions in the $1M-$5M range.

If you're short on cash but have retirement savings:

Add ROBS to the mix. Use 401(k) rollover to supplement your equity injection, reducing the cash you need at closing. Combine with SBA + seller note for maximum leverage. Note: C-corp requirement adds ongoing compliance costs.

If the deal is over $5M or needs to close fast:

Go conventional bank loan + seller note + mezzanine (if needed). No SBA cap or processing delay. Higher rates and shorter terms, but speed wins competitive situations. Consider seller earnout to bridge valuation gaps.

If the business is asset-heavy (real estate, equipment):

Consider SBA 504 for the fixed assets + SBA 7(a) for working capital. The 504's lower blended rate (5-7%) on real estate saves tens of thousands over the loan life. Add equipment financing for machinery upgrades post-closing.

Structuring Your Acquisition Financing

Financing is one piece of the puzzle. The purchase agreement, due diligence, and deal structure determine whether your investment is protected. Our experienced M&A counsel knows which financing structures work and which ones create problems.

Submit your transaction details for review by Alex Lubyansky. We will assess the deal, recommend a financing structure, and outline the engagement.

Submit Transaction Details

Senior counsel on every deal • 15+ years of exclusive M&A experience • Nationwide practice

Frequently Asked Questions

What is the best loan to buy a business?

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The SBA 7(a) loan is the most popular financing option for business acquisitions under $5 million. It offers the longest repayment terms (10-25 years), lowest down payment requirements (10-20%), and competitive interest rates (prime + 2.25-4.75%). However, the 'best' loan depends on your deal. Conventional bank loans close faster, seller financing requires no third-party approval, and ROBS strategies let you use retirement funds with zero debt. Most acquisitions use a blended structure combining 2-3 sources.

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

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Most business acquisitions require 10-25% down payment, depending on the financing structure. SBA 7(a) loans typically require 10-20% equity injection. Conventional bank loans require 15-30%. If you combine SBA financing with seller financing, you may be able to reduce your cash outlay to 10-15% of the purchase price. For a $2 million acquisition, expect to bring $200,000-$500,000 in cash or equivalent equity to the table.

Can I use an SBA loan to buy a business?

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Yes. The SBA 7(a) loan program is specifically designed to help buyers acquire existing businesses. You can borrow up to $5 million to cover the purchase price, working capital, and even some transaction costs. Requirements include a minimum 10-20% equity injection, a personal guarantee, a debt service coverage ratio of 1.25x or higher, relevant industry experience or a strong management plan, and a detailed business plan with financial projections.

What credit score do I need to buy a business?

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Most SBA lenders require a minimum personal credit score of 680-700, though some preferred lenders will consider scores as low as 650 with strong compensating factors (high equity injection, excellent cash flow, significant industry experience). Conventional bank loans typically require 700+ credit scores. If your credit score is below 650, consider seller financing (no credit check required), partnering with a higher-credit co-buyer, or improving your score before pursuing acquisition financing.

How long does SBA loan approval take for a business acquisition?

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The SBA 7(a) loan process typically takes 45-90 days from application to funding. The timeline breaks down as: pre-qualification and document gathering (1-2 weeks), formal application and underwriting (3-4 weeks), SBA authorization (1-2 weeks), and closing and funding (1-2 weeks). Preferred lenders can approve loans without waiting for SBA review, which can save 2-3 weeks. Having complete documentation ready - including the purchase agreement, business financials, and your business plan - is the biggest factor in accelerating the process.

What percentage down is typical for SBA acquisition loans?

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SBA 7(a) acquisition loans typically require a 10-20% equity injection from the buyer. The exact percentage depends on the strength of the business's cash flow (DSCR), the buyer's credit profile, and how much of the deal is covered by a seller note. When a seller finances 10-15% as a subordinated note, the SBA often accepts a 10% cash injection from the buyer, reducing the minimum cash required at closing. The equity injection can come from personal savings, ROBS (401k rollover), or a combination of both.

What is seller financing in a business acquisition?

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Seller financing is when the business seller acts as the lender, allowing you to pay a portion of the purchase price over time instead of all at closing. Typical terms include 10-30% of the purchase price financed by the seller, 6-10% interest rates, 3-7 year repayment periods, and monthly or quarterly payments with a balloon payment at maturity. Seller financing benefits both parties: buyers need less upfront capital, and sellers often get a higher total price while deferring capital gains taxes through installment sale treatment.

Can seller financing close the gap between my cash and the asking price?

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Yes, seller financing is specifically designed for this purpose. If a business is listed at $2M and you have $300K in cash, a structure of $1.4M SBA loan plus $300K seller note brings your equity requirement down to $300K (15%). The seller note covers the gap and lets you close without coming up with additional cash. Lenders generally accept seller notes up to 20-25% of the purchase price, provided the note is subordinated to the bank debt and payments may be deferred (stood by) for 12-24 months per SBA requirements.

What is rollover equity and when do buyers request it?

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Rollover equity is when the selling owner retains a minority equity stake in the business after the sale, rather than receiving all cash at closing. In a typical rollover, the seller might take 80% of the purchase price in cash (or a combination of cash and debt) and roll the remaining 20% into equity in the newly owned entity. Buyers request rollover equity when they want the seller's continued alignment with the business's success, when they need to reduce the cash required at closing, or when the business's value depends heavily on seller relationships. It is most common in private equity-backed deals but increasingly appears in independent sponsor and search fund transactions.

Can I buy a business with no money down?

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While technically possible, zero-down acquisitions are rare and require creative structuring. Options include: ROBS (Rollover for Business Startups) to use retirement funds as equity without taking on debt, 100% seller financing (uncommon - sellers typically want at least 50-70% at closing), or a combination of seller financing and earnout that defers most of the purchase price. Even in these structures, you'll need cash for working capital, transaction costs, and the transition period. Expect to spend $50,000-$150,000 minimum regardless of how you finance the purchase price.

What is the debt service coverage ratio (DSCR) for a business acquisition loan?

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The debt service coverage ratio (DSCR) measures whether the business generates enough cash flow to cover all debt payments. Lenders typically require a minimum DSCR of 1.25x, meaning the business must generate $1.25 in net operating income for every $1.00 in annual debt service. For a $3 million SBA loan with $400,000 in annual payments, the business needs at least $500,000 in adjusted net income. Common mistakes include relying on inflated seller add-backs and forgetting to include all debt payments (including seller notes) in the calculation.

Is a Quality of Earnings report the same as an audit?

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No. A Quality of Earnings (QoE) report and an audit serve different purposes. An audit verifies that financial statements conform to GAAP and are free from material misstatement. A QoE analysis goes deeper into the reliability and sustainability of earnings for transaction purposes - it adjusts reported EBITDA for non-recurring items, owner-specific expenses, and revenue quality issues, and assesses whether the earnings are repeatable under new ownership. Lenders and buyers commission QoE reports to stress-test the seller's claimed EBITDA. An audit confirms historical accuracy; a QoE report tells you whether those historical numbers are a fair representation of the business going forward.

How does the LOI tie to the financing plan?

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The Letter of Intent locks in the deal price and structure before financing is confirmed. If you negotiate an LOI and then discover the financing doesn't work at that price, you either lose the deal or negotiate from weakness. The LOI should include a financing contingency that gives you the right to exit if you cannot secure acceptable financing within a defined period. More importantly, your financing pre-qualification should be complete before you submit the LOI, so you know exactly what deal size, structure, and DSCR your lender will support. The LOI also signals the financing plan to the seller - whether you intend to use SBA, bank debt, or seller financing affects the seller's net proceeds and tax treatment.

When are personal guarantees required for acquisition loans?

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Personal guarantees are required on virtually all SBA loans and most conventional bank acquisition loans. The SBA mandates unlimited personal guarantees from any individual who owns 20% or more of the borrowing entity. This means your personal assets - home, savings, investment accounts - are pledged as collateral behind the loan. Conventional lenders have similar requirements. The only way to avoid a personal guarantee on acquisition debt is through private equity or institutional capital structures where the deal is funded entirely through fund vehicles with no personal recourse. For individual buyers, personal guarantee exposure is a real risk that must be sized and managed carefully.

Can a search fund close without sponsor equity?

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Search funds typically require searcher equity (the searcher's personal investment) and investor equity (capital from the search fund's backers) to close. Without sponsor equity, a search fund cannot meet the SBA's equity injection requirements or demonstrate sufficient skin in the game to bank lenders. Some searchers attempt to close acquisitions using only SBA debt and seller financing, but most lenders require evidence of committed equity from the search fund's investors. Independent searchers who operate outside a formal search fund structure may rely more heavily on SBA financing, but still need to document a clear equity source at closing.

Do mezzanine lenders take collateral?

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Mezzanine lenders generally take a subordinated security interest in the business's assets, but their collateral position is junior to the senior lender's (bank or SBA) first-priority lien. In practice, mezzanine lenders rely more on cash flow rights and equity kickers (warrants or conversion rights) than on hard collateral, because senior lenders will have priority on any asset liquidation. Some mezzanine lenders require personal guarantees from principal owners. The mezzanine lender's primary protection is the intercreditor agreement, which governs how proceeds are distributed between senior and junior creditors if the borrower defaults.

Does financing affect the purchase agreement?

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Yes, significantly. The purchase agreement must align with the financing structure or the deal cannot close. Key areas where financing affects the purchase agreement include: representations and warranties about the business's financial condition (which lenders rely on for underwriting), the working capital target and adjustment mechanism (which lenders factor into the loan), indemnification provisions (which interact with seller note offset rights), closing conditions (including a financing contingency), and payment mechanics at closing (which must coordinate with lender disbursement timing). An M&A attorney who understands both the legal and financing dimensions of the deal is essential to making sure the purchase agreement and loan documents work together.

Can rollover equity be structured as preferred or common stock?

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Yes. Rollover equity can be structured as either common equity (same class as the buyer's equity) or preferred equity (with priority on distributions and liquidation). In most search fund and independent sponsor deals, rollovers are structured as common equity to keep the cap table simple. In private equity transactions, sellers may receive preferred equity with a stated return and liquidation preference, effectively giving them a more debt-like instrument with equity upside. The structure of rollover equity affects the seller's tax treatment, the buyer's governance rights, and how future distributions are allocated. These terms require careful negotiation and should be documented in a shareholders' or operating agreement.

What happens if financing falls through before close?

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If financing falls through and the LOI or purchase agreement includes a financing contingency, you can exit the deal and recover your deposit. Without a financing contingency, you may forfeit your earnest money deposit (typically $25,000-$100,000 for deals in the $1M-$5M range) and potentially face breach of contract claims from the seller. This is why financing pre-qualification must happen before the LOI is signed - not after. If you are already under a purchase agreement and financing fails, your options are: renegotiate the purchase price to a level your financing supports, find an alternative lender, bring in an equity partner, or exit and accept the consequences of the contingency terms.

Should I use seller financing or a bank loan to buy a business?

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Use both. The strongest acquisition financing structures combine bank or SBA financing (60-80% of the purchase price at the lowest rates) with seller financing (10-20% as a subordinated note). This reduces your equity requirement, gives the seller ongoing income and tax benefits, and signals the seller's confidence in the business's continued success. Most SBA lenders actually prefer deals that include seller financing because it demonstrates seller alignment and reduces the bank's risk.

What are the biggest financing mistakes when buying a business?

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The five most expensive financing mistakes are: (1) underestimating total capital needs - budgeting only the purchase price and ignoring working capital, transaction costs, and transition expenses, (2) relying on inflated seller add-backs that won't survive lender scrutiny, (3) starting the financing process too late - after the LOI instead of before, (4) not structuring the deal for lender compatibility - mismatched terms or missing SBA requirements, and (5) personal guarantee exposure - overleveraging without understanding the downside risk to personal assets.