When you receive an offer for your business, the price is only part of the picture. How the buyer plans to pay for it matters just as much. A five million dollar offer means different things depending on whether it is all cash at closing, partially financed by you, or contingent on earnouts.
Understanding how buyers finance acquisitions helps you evaluate offers, structure deals that work for both parties, and avoid pitfalls that can derail transactions.
SBA Loans: The Most Common Path for Smaller Deals
For acquisitions under five million dollars, SBA-backed loans are the most common financing vehicle. The Small Business Administration does not lend directly but guarantees a portion of loans made by participating banks, reducing lender risk and enabling deals that might not otherwise happen.
How SBA 7(a) loans work for acquisitions:
Maximum loan amount of five million dollars. Buyer typically contributes 10-20% as a down payment. Loan terms of ten years for business acquisitions. Interest rates typically Prime plus 2-3%. Personal guarantee required from the buyer. Business must meet SBA size standards and eligibility requirements.
What this means for sellers:
SBA deals typically result in most of the purchase price paid at closing in cash. The SBA process adds time, usually 60-90 days for underwriting and approval. Lenders will scrutinize your financials and require clean documentation. The bank may impose conditions that affect deal structure.
SBA buyers are often first-time business owners or individuals leaving corporate careers. They tend to be motivated, hands-on operators who plan to run the business themselves.
Conventional Bank Financing
Some acquisitions are financed through conventional bank loans without SBA backing. This is more common for larger transactions or buyers with strong banking relationships and significant assets.
Conventional loans typically require more equity from the buyer, often 25-40% down. Terms may be shorter, and rates may be higher than SBA loans. However, the process can sometimes be faster with fewer bureaucratic requirements.
Banks making conventional acquisition loans want to see strong cash flow coverage, quality collateral, and experienced buyers. They are most comfortable with asset-heavy businesses where equipment or real estate provides security.
Private Equity Financing
Private equity firms finance acquisitions differently. They raise capital from institutional investors (pension funds, endowments, wealthy individuals) and deploy it to acquire companies.
How PE deals are typically structured:
PE firms use a combination of equity (their fund capital) and debt (borrowed money). A typical deal might be 40-60% equity and 40-60% debt. The debt is often provided by specialized lenders comfortable with acquisition financing. PE firms seek returns of 20% or more, which influences how much they can pay.
What this means for sellers:
PE buyers often pay higher multiples for quality businesses because they have capital ready to deploy and competition among firms. They typically pay mostly cash at closing, though earnouts and rollover equity are common. Due diligence is thorough and professional. They often want the seller to retain a minority stake (rollover equity) to align incentives.
PE is most active for businesses with EBITDA above one to two million dollars. Below that threshold, the economics typically do not work for institutional buyers.
Seller Financing
In many transactions, particularly smaller ones, the seller provides part of the financing. This is called seller financing, a seller note, or a seller carry.
How seller financing works:
The seller agrees to receive a portion of the purchase price over time rather than all at closing. Typical terms might be 10-30% of the purchase price, paid over three to seven years, with interest rates of 5-8%. The note is usually subordinated to senior bank debt, meaning the bank gets paid first.
Why sellers agree to this:
Seller financing can enable deals that would not otherwise happen. It demonstrates confidence in the business you are selling. It can expand the buyer pool by reducing the upfront capital required. Interest income provides a return on the note. It may provide tax benefits by spreading gains over multiple years.
The risks:
If the business fails under new ownership, you may not get paid. As a subordinated creditor, you are behind the bank in any recovery. You remain tied to the business performance after you have lost control. Collecting on a defaulted note can be difficult and expensive.
The terms of seller financing, amount, interest rate, term, security, and covenants, are all negotiable. Sellers should work with experienced advisors to structure notes that provide reasonable protection.
Earnouts
An earnout is a portion of the purchase price contingent on the business achieving certain performance targets after closing. Earnouts are not financing exactly, but they affect how much you actually receive.
Common earnout structures:
A percentage of the purchase price (often 10-30%) tied to revenue or EBITDA targets over one to three years. Payments made annually or at the end of the earnout period. Targets based on maintaining current performance or achieving growth.
Why earnouts exist:
Earnouts bridge valuation gaps between buyers and sellers. If you believe the business is worth more than the buyer wants to pay upfront, an earnout lets you prove it and capture that value. They also align incentives during transition periods.
The reality of earnouts:
Studies suggest 40-60% of earnouts do not pay out fully. Once you no longer control the business, the buyer makes decisions that affect whether targets are met. Disputes over earnout calculations are common. You should evaluate any offer with an earnout conservatively, assuming you may not receive the full amount.
Comparing Financing Sources
Source
Deal Size
Cash at Close
Timeline
SBA 7(a)
Up to $5M
80-90%
60-90 days
Conventional
Varies
60-75%
45-60 days
Private Equity
$5M+
70-90%
60-120 days
Seller Finance
Any
70-90%
Faster
Evaluating Offers
When comparing offers, look beyond the headline number:
Cash at closing. How much will you actually receive when the deal closes? This is the most certain money.
Seller financing terms. If you are carrying a note, what are the interest rate, term, security, and covenants? What happens if the buyer defaults?
Earnout structure. Are the targets realistic? Will you have any influence over whether they are met? How are disputes resolved?
Buyer credibility. Does the buyer have the resources and track record to close the deal and succeed with the business?
Financing contingencies. Is the offer contingent on obtaining financing? What happens if the loan is not approved?
A lower offer with certain cash at closing may be worth more than a higher offer with significant seller financing and aggressive earnouts.
Working With Buyer Financing
Understanding buyer financing helps you be a better partner in getting deals done:
Prepare your financials to withstand lender scrutiny. Clean, documented, defensible numbers make financing easier to obtain.
Be realistic about seller financing. Some deals require it. Structure notes that protect you while enabling the transaction.
Understand the timeline. SBA and PE processes take time. Build realistic expectations into your planning.
A complimentary Opinion of Value can help you understand not just what your business might be worth, but what deal structures are realistic given your size and buyer universe.
The best deal is not always the highest price. It is the one that actually closes on terms that work for you.
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