Most small business acquisitions are financed with an SBA 7(a) loan covering up to 90% of the purchase, a buyer down payment of at least 10%, and often a seller note. Lenders qualify the deal on the business's historical cash flow, which must cover all the new debt payments at least 1.25 times, and on an independent valuation.
SBA rewrote its acquisition rules in SOP 50 10 8.1, effective October 1, 2026. The figures below follow the new version. This post walks through how one hypothetical deal gets built, then covers the rules and alternatives around it.
How is a business acquisition typically structured?
Most deals combine three or four sources of money, called the capital stack.
| Source | Typical share | Notes |
|---|---|---|
| SBA 7(a) loan | Up to 90% | Up to $5 million. 10-year term for the business itself, up to 25 years for any real estate |
| Buyer cash | At least 5% to 10% | Must be your own money, or a personal loan repaid from outside the business |
| Seller note on full standby | Up to 5% | Counts as equity only if the seller takes no payments for the life of the SBA loan |
| Seller note with payments | Varies | Allowed as extra debt, but it counts in the cash flow test and total debt can't exceed the valuation |
| Real estate loan | If the building is included | A separate 7(a) or a 504 loan |
Buying an open franchise location follows the same structure, with one extra step: the franchisor has to approve the transfer, and lenders plan the closing around that approval. Franchise financing covers how those purchases are usually funded.
What does a real deal look like on paper?
Here is a hypothetical. Say a buyer with 12 years of experience managing HVAC crews agrees to buy an HVAC company for $1,120,000. No real estate is included. The buyer wants $80,000 of working capital in the loan.
Step 1: Total project cost and equity
- Purchase price: $1,120,000
- Working capital: $80,000
- Total project cost: $1,200,000
- Minimum equity at 10%: $120,000
SBA calculates equity on the whole project, including working capital, not just the price.
The buyer has $70,000 in cash. The seller agrees to a $50,000 note on full standby, with no payments until the SBA loan is paid off. The standby note covers $50,000 of the equity, which is under the half-of-equity limit of $60,000. Buyer cash covers the other $70,000.
Step 2: Loan amount and payment
- SBA 7(a) loan: $1,200,000 − $120,000 = $1,080,000
- Term: 10 years, as required for a business with no real estate, with no balloon payment
- Assume a 10% rate. Payment: about $14,272 a month, or $171,267 a year
- FY2027 upfront SBA guaranty fee: 75% guaranteed = $810,000 × 3.5% = $28,350, usually financed into the loan
Step 3: The cash flow test
SBA requires 1.25x coverage for an Initial Acquisition, based on the business's last fiscal year or a two-year average. The lender can't use your projections to pass this test.
- Seller's average EBITDA over the last two years: $305,000
- Adjust for owner pay: the seller took $35,000 in salary, and a market salary for the buyer's role is $100,000. Subtract the $65,000 difference: $240,000 adjusted EBITDA
- DSCR: $240,000 ÷ $171,267 = 1.40x. It passes
- Minimum EBITDA needed at 1.25x: $171,267 × 1.25 = $214,084
That $26,000 of headroom over the minimum is a thin margin. A lender will also run a global analysis to confirm the buyer's household can live on the $100,000 salary and still meet personal obligations at 1.0x coverage.
Step 4: The valuation
An independent business valuation is required on every SBA-financed purchase. It is ordered by the lender and performed by a credentialed appraiser. Say it comes back at $1,000,000 instead of $1,120,000. Total acquisition debt can't exceed the valuation, so the $1,080,000 loan no longer fits. The buyer either renegotiates the price or covers the gap with more cash or more full-standby debt, on top of the required 10%. Many deals get renegotiated at this stage.
What are SBA's acquisition rules under SOP 50 10 8.1?
The new SOP sorts every change of ownership into one of four categories, each with its own rules.
| Transaction type | Who it's for | Minimum equity | Minimum DSCR | Quality of Earnings report |
|---|---|---|---|---|
| Initial Acquisition | A buyer purchasing a business they don't already own | 10%, can't be reduced | 1.25x | Required if price is $3 million or more |
| Business Expansion | An existing business, operating 2+ years, buying another in the same industry | 10%, can be reduced or waived | 1.15x | Required if price is $3 million or more |
| Owner Buyout | Existing owners buying out a partner | 10% of price, can be reduced or waived | 1.25x | Not required |
| ESOP or Co-op | Employees buying a controlling interest | Not required for 51%+ ESOP purchases | 1.25x | Not required |
Other rules that shape almost every deal:
- Ownership. Since March 1, 2026, all owners of the borrowing business must be U.S. citizens or U.S. nationals living in the U.S.
- Seller notes. A seller note can be refinanced only after it has been in place and current for 36 months.
- Total debt cap. All acquisition debt combined, including seller notes that aren't on standby, can't exceed the business valuation.
- No 7(a) Small loans. Acquisitions must be underwritten under standard 7(a) rules, regardless of size.
- Quality of Earnings. On Initial Acquisitions and Expansions of $3 million or more, excluding real estate, the lender must also get an independent Quality of Earnings report, including a reconciliation of bank deposits to reported income.
For how the rest of SBA eligibility works, see our guide to SBA loan requirements for 2026.
What if the business comes with real estate?
When the building is part of the sale, the real estate can be financed on a longer schedule than the business. It can be blended into the 7(a) loan with a weighted term, or split into a separate loan. A 504 loan can finance the building only as a separate loan, not blended into the acquisition note. Equity is split pro rata across the two loans.
Say the HVAC company also owns its $600,000 shop and the buyer wants it. The project grows to $1,800,000 and the minimum equity to $180,000. The building portion can amortize over 25 years, which lowers the total payment and helps the cash flow test. Compare options in our post on SBA 7(a) vs. 504 or with a conventional commercial mortgage.
What are the alternatives to an SBA acquisition loan?
SBA financing is the most common route for deals under $5 million, but not the only one.
| Option | When it fits | Trade-off |
|---|---|---|
| Conventional bank loan | Strong buyer, strong business, lots of tangible assets | Usually requires more down, often 20% to 30%, and shorter terms |
| Seller financing | Seller wants a faster sale or tax spreading | Seller carries the risk and may want a higher price or rate |
| Equipment financing | Asset-heavy businesses such as construction or trucking | Covers only the equipment portion of the price |
| Investor equity | Larger deals or buyers short on cash | You give up ownership and some control |
| Short-term business loans | Small purchases or quick closings | Much higher payments. Rarely suitable for the full purchase price |
Equipment financing can also lighten the load on a main acquisition loan when a large share of the value is in trucks or machinery. A term loan can sometimes fund a small tuck-in purchase for an existing business, but shorter terms make the payment much higher than a 10-year SBA loan.
How do you prepare to finance an acquisition?
- Get the seller's financials early. Lenders need three years of business tax returns and financial statements, plus current interim statements with the prior year's comparison. If the seller won't share them before the LOI, that's a warning sign.
- Check the math yourself first. Take the seller's EBITDA, subtract a market salary for yourself, and divide by the loan payment. Under 1.25x, the deal won't pass as priced.
- Document your equity. Lenders want to see where the down payment came from, usually with two to three months of bank statements.
- Put the seller note terms in the LOI. Say whether the note will be on full standby.
- Build in time for the valuation. A valuation below the price is common, and your purchase agreement should give you room to renegotiate.
Sagamore is a commercial loan broker, not a lender. We review the deal, check it against SBA and conventional guidelines, and match you with lenders active in acquisition lending for your industry. The lender decides approval and terms. When you have a letter of intent or a target business, start your application and send the seller's numbers.
