Quick answer: Buyers finance an acquisition with layers of capital: their own equity, senior bank debt, a seller note, rollover equity and occasionally mezzanine debt. A loan under SBA’s 7(a) program can also finance a change of ownership.[1] Lenders size debt to cash flow rather than price, so the layer with the least room caps what the buyer can pay, and seller notes, rollover equity and earnouts fill any gap by moving risk to the seller.
Key points
- A purchase is paid from layers of capital ranked by who is repaid first, and the layer with the lowest limit sets the price a buyer can pay.
- Lenders size debt to cash flow and to the downside, not to the price, so a higher price has to be filled by equity, seller financing or contingent payments.
- Seller notes, rollover equity and earnouts move risk to the seller, so their terms matter as much as their size.
- SBA’s 7(a) program lists changes of ownership as a permitted use and caps the loan at $5 million.[1]
The capital stack, ranked by who is repaid first
A purchase price is paid from layers of capital, and each layer trades cost against claim. Senior debt costs the least and is repaid first, so lenders advance it only against cash flow and collateral they can verify. Equity costs the most and is repaid last, so it absorbs the first loss. A buyer’s financing plan is a choice of layers, and the layer with the least room, more than the seller’s price, often sets the most the deal can pay.
| Layer | Who provides it | Repaid | What it asks of the buyer |
|---|---|---|---|
| Senior bank debt | A bank or other lender | First, on a fixed schedule from cash flow | Collateral, financial covenants and often personal guarantees |
| Guaranteed loan | A lender, with part of the loan guaranteed by a government program | As a senior loan, on its own schedule | Program and lender conditions that change over time |
| Seller note | The seller | After the senior lender, on a schedule | Terms that can pause payments in a poor year |
| Mezzanine debt | A specialty lender or fund | After senior debt and before equity | Higher interest, often with a share of the upside |
| Rollover equity | The seller | Last, when the company is sold or recapitalized | Shared ownership and often shared control |
| Buyer equity | The buyer and its investors | Last, after every other claim | Cash that absorbs the first loss |
Equity sits at the bottom of the table because it takes losses first, which is why lenders want to see the buyer’s own money in the deal. The bridge from enterprise value to equity value shows how the price paid for a business divides between lenders and owners.
What lenders examine before they commit
Lenders size debt to the cash a business produces, not to the price. They start from restated earnings, subtract capital spending and taxes, and ask how many times that cash covers the payments on the loan. Then they test what could go wrong.
- Cash flow against payments. The lender stresses the figure to see how far it could fall before a payment is missed. The funding ceiling in the guide to valuing an acquisition target comes from the same test.
- The quality of the earnings. On larger deals lenders often ask for an independent review, which makes quality of earnings work part of the financing timetable.
- Concentration and owner dependence. A loan is repaid from customers who may leave, so lenders read the customer concentration and the owner’s role closely.
- Collateral and guarantees. Equipment, receivables, inventory and real estate can back the loan, and the loan documents state which assets and which personal guarantees the lender requires.
- The buyer. Industry experience, liquidity and the share of the price paid from the buyer’s own cash all count.
A lender’s term sheet is the first hard evidence of what the deal can carry. A buyer that holds one before submitting a letter of intent can state a financing plan that the seller has reason to believe.
SBA-guaranteed loans within the stack
SBA’s 7(a) program lists changes of ownership, complete or partial, among the permitted uses of a loan, and the maximum loan amount is $5 million.[1]
SBA guarantees up to 85% of loans of $150,000 or less and 75% of larger loans.[2]
The guarantee runs to the lender and limits its loss if the loan is not repaid. The borrower still owes the loan in full, and the loan documents state the collateral and personal guarantees the lender requires.
Because the cap is a fixed amount, a larger purchase needs other layers beside the loan. How a 7(a) loan can sit beside a seller note, rollover equity or other debt depends on current lender and SBA requirements. SBA’s Standard Operating Procedure 50 10 8.1 took effect on October 1, 2026,[3] so older articles on acquisition loans may be out of date, and a buyer confirms the rules in force with the lender before a letter of intent states the structure. The guide to SBA 7(a) loans for buying a business covers the program’s terms, rates and maturities.
How the layers change what a buyer can pay
The most a deal can pay is the sum of what each layer will fund. When a seller’s price is above that sum, the gap is filled by shifting risk between buyer and seller, and each way of filling it has a cost.
| If the gap is filled with | The buyer gains | The buyer gives up | The seller takes on |
|---|---|---|---|
| More buyer equity | No new fixed payments | A larger investment and a lower return on it | Nothing new |
| A larger seller note | Less cash needed at closing | Larger fixed payments behind the bank | The buyer’s credit risk |
| Rollover equity | Less cash needed and a seller who shares the outcome | Some ownership and say | An illiquid minority stake |
| An earnout | A payment that comes only if results arrive | Simplicity and some control | The risk that the target is missed |
| Mezzanine debt | A gap filled without more equity | Higher cost and a claim on the upside | Nothing new |
A fixed payment is the riskiest addition because it falls due in a poor year. Rollover equity and earnouts flex with results, which suits a gap that comes from disagreement about the future instead of a shortage of cash. The guide to rollover equity and seller notes explains the seller’s side of each, and the guide to installment sales covers how a note affects the timing of the seller’s tax.
Sources and uses for a worked purchase
Sources and uses is the table that proves a financing plan balances: the dollars the deal needs on one side, where each comes from on the other, and equal totals.
Illustrative example: A purchase funded from five sources
A buyer agrees to pay $6,000,000 on a cash-free, debt-free basis for a business with normalized EBITDA of $1,300,000. The figures are invented to show the mechanics and are not benchmarks, and the payment rates are placeholders, not rates any lender will quote.
| Uses | Amount |
|---|---|
| Purchase price | $6,000,000 |
| Legal, accounting, diligence and lender fees | $300,000 |
| Cash left in the business for working capital | $200,000 |
| Total uses | $6,500,000 |
| Sources | Amount |
|---|---|
| Senior bank debt | $3,000,000 |
| Seller note | $500,000 |
| Rollover equity | $500,000 |
| Cash equity from the buyer and its investors | $2,500,000 |
| Total sources | $6,500,000 |
The seller receives $5,000,000 in cash at closing, which is the $6,000,000 price less the $500,000 note and the $500,000 rollover, before the seller pays off any debt of the business. The buyer has $2,500,000 of cash at risk.
A lender tests the payments. A placeholder level annual payment of 15 percent of the bank loan, covering interest and principal, costs $450,000 a year. Interest-only payments on the seller note at a placeholder 6 percent cost $30,000, so total debt service is $480,000. If cash flow available for debt service is $1,000,000 after capital spending and taxes, it covers the payments about 2.1 times and could fall by $520,000, a little over half, before a payment is missed.
Now suppose the seller wants $7,000,000. The lender sizes its loan to cash flow, so it still advances $3,000,000, and the extra $1,000,000 has to come from more equity, a larger note, rollover or an earnout, each with the costs shown in the table above.
Where financing meets the letter of intent
The seller reads financing as risk. A financing condition lets the buyer withdraw if the loan is not approved, so the seller carries the chance that the deal fails after exclusivity has stopped other buyers from calling. Buyers narrow the risk by naming the lender, stating how far the credit process has advanced and limiting the condition to final approval. The guide to writing a letter of intent as a buyer covers the drafting, and the seller’s side is in the guide to reading a letter of intent. The buyer’s roadmap shows where financing falls among the other stages. This page is general education and not lending or investment advice.
Frequently asked questions
What are the main ways to finance a business acquisition?
Buyers combine layers: their own cash equity, senior debt from a bank, a seller note, rollover equity from the seller and occasionally mezzanine debt. SBA guarantees part of the loan to the lender under its 7(a) program.[2] Each layer has a different cost and a different place in the line for repayment, and the amount lenders will advance often caps the price a buyer can pay.
Can a seller finance part of the sale?
Yes. A seller note is a common tool in which the seller lends part of the price to the buyer. It is usually ranked behind the bank, so it is repaid only if the business performs and the bank permits payments. Sellers ask about security, the interest rate, the payment schedule and what happens on default.
How much can a buyer borrow with an SBA 7(a) loan?
A 7(a) loan can be up to $5 million, and SBA’s maximum exposure is $3.75 million.[2] The program permits loans for changes of ownership.[1] How much a particular lender will advance depends on the cash flow, the collateral and the buyer’s profile, so buyers ask a lender early.
Do lenders finance the price or the cash flow?
Lenders look to cash flow first. They size a loan to the cash the business produces after capital spending and taxes and to how far that cash could fall before payments are missed, with collateral as a second source of repayment. A higher price does not raise what a lender will advance, so the difference has to come from other layers.
Thinking about a sale or an acquisition?
The Impetus Group provides sell-side and buy-side M&A advisory, from preparation and buyer outreach to negotiation and closing. A transactional valuation is often the first step, scoped and priced separately.
Related guides
- Rollover Equity and Seller Notes: Deferred Consideration Explained: Rollover equity and seller notes defer part of a sale price. Learn how each works, how their risks differ and what to ask before accepting either.
- SBA 7(a) Loans for Buying a Business: What to Know Before You Apply: SBA 7(a) loans can finance a change of ownership. See the loan cap, guarantee levels, rate and maturity rules, the SOP 50 10 8.1 date and what sellers should expect.
- From Enterprise Value to Equity Value: What the Owner Receives: Enterprise value is the price of the business. Equity value is what owners receive after debt, debt-like items, cash and working capital. See the bridge.
- Installment Sale of a Business: How Seller Financing Defers Tax and Adds Risk: The installment method reports gain as a seller note is paid. See how deferral works, which parts of a sale qualify and the default risk the seller takes on.
- Valuing an Acquisition Target: How a Buyer Decides What to Pay: How a buyer values an acquisition target: restate earnings, price the risks, test the return and funding limits, then set a walk-away price. With a worked example.
- Sourcing Acquisition Targets: How Buyers Find Businesses to Buy: Where buyers find acquisition targets: broker listings, advisor-led processes, direct outreach to owners, industry contacts and referrals, plus pipeline tracking.
Sources
- 7(a) loans. U.S. Small Business Administration. Accessed October 13, 2026.
- 7(a) loan program terms, conditions and eligibility. U.S. Small Business Administration. Accessed October 13, 2026.
- Information Notice: Issuance of SOP 50 10 8.1. U.S. Small Business Administration. Accessed October 13, 2026.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.