Financing · 5 min read · Breakthru Ventures

Most first-time buyers focus on the purchase price. Experienced buyers spend just as much time on the structure, because how a deal is financed decides how much cash you put in, how much risk you carry after closing, and how much room the business has to breathe in a bad quarter. Two deals at the same price can produce very different outcomes for the owner.

This article walks through the four building blocks most small business acquisitions use: senior debt (often an SBA 7(a) loan), seller financing, buyer equity and contingent consideration such as earnouts.

Start with the cash flow, not the price

Every layer of financing is paid from the same place: the business’s free cash flow after the new owner’s reasonable compensation. Before you think about structure, build a simple view of normalized cash flow and ask how much annual debt service it can support with a comfortable cushion. Lenders typically look at a debt service coverage ratio, comparing available cash flow to required principal and interest payments. A business that barely covers its payments on paper has no margin for a lost customer, a key employee leaving or a slow season.

Work backwards from that number. The supportable debt, plus the equity you can raise, plus what the seller is willing to defer, is the realistic price range. If the asking price sits well above it, structure alone rarely closes the gap.

Senior debt and the SBA 7(a) program

For many acquisitions of established small businesses in the United States, the senior loan is an SBA 7(a) loan made by a bank or other approved lender and partly guaranteed by the U.S. Small Business Administration. The guarantee lets lenders finance deals they might not otherwise support, often with longer terms than a conventional loan.

A few widely known features are worth understanding before you approach lenders:

• Loan size. The standard 7(a) program has a maximum loan amount of $5 million.
• Term. Business acquisition loans commonly carry terms of up to 10 years, longer when real estate is included. A longer term lowers annual debt service, which helps coverage.
• Personal guarantees. Owners of 20% or more of the borrowing business are generally required to personally guarantee the loan.
• Equity injection. SBA rules require the buyer to put real money into a change-of-ownership deal. The minimum and what counts toward it (including whether part of a seller note can count) are set by SBA’s Standard Operating Procedures, which have changed several times in recent years.

Because program rules and lender policies change, treat any rule of thumb as a starting point and confirm current requirements with an SBA lender early. Lenders also differ in appetite by industry, deal size and buyer background, so talking to more than one is normal.

Conventional bank loans, without the SBA guarantee, are another option for larger or very strong deals. They often require more equity and shorter amortization but come with fewer program restrictions.

Seller financing

A seller note is a loan from the seller to the buyer for part of the purchase price, repaid over time after closing. It is one of the most useful tools in small business acquisitions for three reasons:

1. It reduces the cash needed at closing.
2. It aligns incentives. A seller who is still owed money has a reason to support a smooth transition.
3. It signals confidence. A seller who will not carry any paper is telling you something about how they view the business’s future.

Key terms to negotiate include the amount, interest rate, amortization, any interest-only or deferral period and how the note ranks behind senior debt. When an SBA loan is involved, the lender will set conditions on the seller note, which may include a standby period during which the seller receives no payments. Make sure the seller understands those conditions before you sign a letter of intent, not after.

Buyer equity

Equity is the money that absorbs losses first. It may come from your own savings, from family and friends, or from outside investors in a search fund or independent sponsor structure.

The questions to answer are how much equity the deal needs, who provides it, and what each investor receives in return. Outside investors usually expect a defined share of ownership, information rights and some say in major decisions. Agree on those terms in writing well before closing, and make sure the equity structure fits your lender’s requirements on ownership and guarantees.

A common mistake is to stretch every dollar into the purchase price and leave nothing for working capital. Plan for operating cash at closing; a business that changes hands with an empty bank account is fragile from day one.

Earnouts and contingent consideration

An earnout ties part of the price to the business’s future performance, such as revenue or gross profit over the next one to three years. Earnouts can bridge a gap when a seller believes in growth the buyer is not yet willing to pay for.

They also create friction. Disputes often arise over how results are measured, what expenses are allocated and how much control the new owner has over decisions that affect the target. If you use one, define the metric precisely, keep the period short and spell out the accounting rules.

Earnouts are generally not permitted in SBA 7(a) change-of-ownership financing, so deals using that program usually rely on seller notes instead. Check this with your lender before proposing one.

Putting the stack together

A practical sequence looks like this:

1. Normalize cash flow and estimate supportable debt service with a cushion.
2. Talk to lenders to understand realistic senior debt terms for this business.
3. Decide how much equity you can commit and raise.
4. Use a seller note to close the remaining gap and keep the seller engaged.
5. Model the full stack under a downside case: what happens if revenue drops 15% in year one?

If the deal only works in the best case, the structure is too tight.

Bottom line

Good structure does not rescue a bad business, but bad structure can sink a good one. Build the capital stack from cash flow up, understand each lender’s and investor’s conditions early, and leave room for the unexpected.

If you are weighing financing options for a specific deal, contact Breakthru Ventures to talk through structure, modeling and lender readiness.

This article is general information, not financial, legal or tax advice. Consult licensed professionals and your lender about your specific situation.