How do you finance a business acquisition?

An acquisition is usually funded by a mix: money you put in, a loan from a bank or an SBA-backed lender, and often a note from the seller. Lenders size the loan to the cash flow of the business you are buying, so the mix is built around whether that cash flow can cover the payments.

You have found a competitor, a supplier, or a first business to buy, and a price is in sight. The next question is how to pay for it, and the answer depends less on which lender you pick than on what the business earns and how much of your own money goes in.

What are the main ways to pay for an acquisition?

The usual sources are in the table below, and many deals combine two or three of them.

A minority partner is another source: someone who puts in equity for a share of ownership. Under the SBA's rules, a partner who holds less than 20% and has no control over the business can count toward the equity requirement, within limits.

How much do you need to put in?

For a first acquisition financed with an SBA 7(a) loan, at least 10% of the total project cost, and the lender cannot reduce it. Total project cost means all the costs needed to complete the purchase, whatever their source.

A seller note counts toward that 10% only when it is on full standby, which means no payments of principal or interest for the life of the SBA loan. Standby debt, seller notes, and minority partners together can supply no more than half of the required equity. Bank loans outside the SBA set their own requirements, so ask each lender.

What will a lender look at?

The cash flow of the business you are buying, how much of your own money is in the deal, and whether the price holds up. For an SBA change of ownership, that comes down to these points:

• Coverage of the new debt. The SBA defines historical coverage as EBITDA divided by the debt payments after the deal. For a first acquisition it must be at least 1.25 to 1, so a business earning $500,000 of EBITDA can carry up to $400,000 a year of debt payments (an illustration). How to calculate an EBITDA multiple shows how EBITDA is restated first.
• Three years of results. The lender analyzes the three most recent year-end financial statements for the business being acquired, plus current interim statements, and checks the seller's tax returns against IRS tax transcripts.
• An independent valuation. For prices above $350,000, the lender must obtain a valuation from an accredited professional, requested by and prepared for the lender, not for you or the seller.
• A quality-of-earnings report. At a purchase price of $3 million or more, the lender must also obtain an independent report that tests whether the earnings are reliable and will continue.
• You. The lender describes your industry experience and your plan for running the business, and visits the business being acquired.
• The paperwork. The purchase agreement with its schedules, and the buyer's and seller's financial and tax records, go into the loan file.

What do SBA rules change in the deal itself?

Two points matter if the seller expects to be paid over time or to stay involved. Seller earn-outs are prohibited in an SBA change-of-ownership loan, though rebates to the buyer based on business performance are allowed. And in a first acquisition the seller generally cannot stay on as an officer, director, stockholder, or employee, although the buyer can contract with the seller as a consultant for up to 24 months. The SBA's acquisition rules were last updated on October 1, 2026, so ask your lender to confirm the current version.

What costs surprise buyers?

The reports a lender requires, which the SBA allows the lender to pass on to you and which can count toward your equity injection. Add legal and accounting fees, lender fees, insurance, and the working capital the business needs after closing. The change in net working capital explains how that last item can also adjust the price.

What to do next

1. Build a monthly cash flow forecast for the business you are buying, with the new debt payments included, and test whether coverage holds at the ratio your lender uses.
2. Decide how much of your own cash you can commit, and where it comes from.
3. Ask each lender what it requires for a valuation and a quality-of-earnings report before you agree on a price.
4. Settle the structure, the tax treatment, and the terms of any seller note before you make an offer. How to evaluate and negotiate a business acquisition offer covers the offer itself.

We help you build the numbers a lender and a seller will ask about: a valuation range, the cash flow forecast, and the materials in the purchase file. You decide and sign. That is part of our buy-side advisory work.

Questions owners ask

Can I use home equity for my down payment?

You can borrow against your home and use the cash as equity, but the home becomes collateral. The SBA accepts a personal loan as equity only if you can show repayment from a source other than the business's cash flow, and your salary from the business does not count. How the interest is treated for tax depends on how the money is used, so check how the interest is treated before you borrow.

Can I buy a business with no money down?

Not with an SBA loan for a first acquisition: the 10% minimum cannot be reduced, although a seller note on full standby can cover up to half of it. Other lenders set their own terms, and a deal built around a seller note still needs the business's cash flow to cover its payments. Financing options for small businesses compares the choices more broadly.