Raising money to buy a business almost always means stacking sources rather than finding one check that covers everything. A typical deal pairs an SBA 7(a) loan or a conventional bank loan with the buyer’s own cash injection, then fills whatever gap remains with seller financing, outside equity investors, retirement rollovers, or an earnout tied to future performance. The mix you pick drives your monthly debt service for years, so the structure matters more than the headline price.
Below is how each source works, what it costs, and where it fits in the stack.
SBA 7(a) Loans
The 7(a) program is the most common federal financing tool for buying a business. The SBA does not lend directly. It guarantees a portion of a loan made by a participating bank or credit union, which lowers the lender’s risk and opens approval to buyers who would not qualify for a conventional commercial loan on their own. The maximum 7(a) loan is $5 million.1U.S. Small Business Administration. Terms, Conditions, and Eligibility
Terms depend on what the loan finances. A straight business acquisition usually carries a ten-year maturity. Deals that include real estate can stretch to 25 years. Rates are negotiated between borrower and lender but capped by the SBA based on loan size. For loans above $350,000, where most acquisitions land, the maximum variable rate is the prime rate plus 3%. Smaller loans allow wider spreads, up to prime plus 6.5% for loans of $50,000 or less.1U.S. Small Business Administration. Terms, Conditions, and Eligibility
You will need cash at closing. The SBA requires a minimum 10% equity injection when you are buying an existing business, so at least a dime of your own money for every dollar of purchase price. The injection can come from savings, a gift, or a separate personal loan, but not from the same SBA loan. Anyone who owns 20% or more of the acquiring company must personally guarantee the loan.2GovInfo. 13 CFR 120.160 – Loan Conditions
The SBA also charges a guarantee fee that is rolled into the loan rather than paid upfront. For loans over $700,000 with maturities beyond 12 months, the fee is 3.5% on the first $1 million of the guaranteed portion and 3.75% on anything above that. On a multimillion-dollar deal that adds up, so build it into your total financing cost.
One boundary worth flagging: the SBA’s other major program, the 504 loan, is designed for fixed assets like real estate and heavy equipment, not for acquiring a going concern.3U.S. Small Business Administration. 504 Loans If your acquisition includes significant real property, a 504 might cover that piece while a 7(a) handles the rest, but a 504 alone will not fund a business purchase.
Conventional Bank Loans
Banks that do not participate in SBA programs, and borrowers who prefer to skip the SBA paperwork, can pursue standard commercial term loans. These typically require a larger down payment, often 20% to 30% of the purchase price, because the lender bears the full risk without a government guarantee.
Lenders evaluate the target business’s ability to service the new debt using a debt service coverage ratio. Most banks want to see a DSCR of at least 1.25, meaning net operating income is 125% of annual loan payments. To get there, underwriters work through the company’s tax returns, Form 1065 for partnerships and Form 1120-S for S corporations, and reconstruct true owner earnings by adding back one-time or non-recurring expenses that will not continue under new ownership.4Internal Revenue Service. About Form 1065 The Schedule K-1 shows what was actually distributed to previous owners, which gives a cleaner picture of available cash flow than top-line revenue.
Banks almost always secure the loan with a lien on the business assets, filed as a UCC-1 financing statement with the state. That filing puts other creditors on notice that the bank has a priority claim on equipment, inventory, and receivables if you default.5Cornell Law Institute. UCC Financing Statement If the business lacks enough hard assets to collateralize the loan, expect the lender to require personal collateral too, often home equity.
Seller Financing
In many small-business acquisitions, the seller carries part of the purchase price as a loan to the buyer. It is common because it aligns incentives. The seller only gets paid in full if the business succeeds under new ownership. Interest rates on seller notes typically run between 6% and 10%, documented through a promissory note that spells out the payment schedule, interest rate, and what counts as default.
Most seller notes include a balloon payment after three to five years, meaning smaller monthly payments followed by the remaining balance in one lump sum. The expectation is that you refinance into a conventional loan by then. That is not guaranteed, so understand the balloon risk before you sign. If you can negotiate a fully amortizing note, do.
When a bank provides the primary loan and the seller finances the remainder, the bank will almost certainly require a standby agreement. That puts the seller’s note in a subordinate position, so the bank gets paid first if things go sideways. The standby may also delay the seller’s principal payments for several years, restricting the seller to interest-only collections until the senior lender is comfortable with cash flow. Sellers do not love this, but it is often the price of closing the deal.
One piece gets overlooked in seller-note negotiations: the non-compete. If the seller can open a competing business across the street the day after closing, your acquisition just lost most of its value. Non-competes in business sales typically last three to five years and cover the geographic area the business actually serves. Make it a condition of the deal, not an afterthought.
Raising Capital From Equity Investors
Selling ownership stakes in the acquiring company brings in capital without monthly loan payments. You give up a share of future profits and some control over decisions. For deals where the debt load would be dangerously high, equity can make the math work.
Any time you sell ownership interests, you are selling securities, and federal securities law applies. Most private acquisitions rely on Regulation D exemptions, particularly Rules 506(b) and 506(c), which allow a raise without full SEC registration.6U.S. Securities and Exchange Commission. Exempt Offerings Under Rule 506(b), you can sell to up to 35 non-accredited investors in any 90-day period, but you cannot publicly advertise the offering. Rule 506(c) lets you advertise freely but restricts sales to accredited investors.
An individual qualifies as accredited with annual income above $200,000 individually, or $300,000 jointly with a spouse or partner, in each of the prior two years, with a reasonable expectation of the same going forward. A net worth above $1 million, not counting the primary residence, also qualifies.7U.S. Securities and Exchange Commission. Accredited Investors You will prepare a private placement memorandum covering the business model, risks, and projections, which is the investor’s version of a loan application.
You must file Form D with the SEC no later than 15 calendar days after the first sale of securities in the offering.8eCFR. 17 CFR 239.500 – Form D Missing the deadline will not automatically void the exemption, but it can trigger consequences under Rule 507 and create problems if you later raise more capital. Treat it as hard.
The operating agreement for the acquiring entity needs to spell out ownership percentages, voting rights, profit distributions, and the process for future capital calls. These are worth spending money on. Legal fees typically run $5,000 to $15,000 depending on the number of investors and the complexity of the governance.
Retirement Funds and Personal Assets
Rollovers as Business Startups
A ROBS lets you use existing retirement savings to fund a business purchase without triggering early withdrawal penalties or immediate income taxes. You form a new C-corporation, set up a 401(k) plan inside that corporation, roll your existing retirement funds into the new plan, and use the plan to purchase stock in the C-corporation. The corporation then has cash from the stock sale to buy the business.9Internal Revenue Service. Rollovers as Business Start-Ups Compliance Project
The IRS does not call ROBS an abusive tax shelter, but it does call these arrangements “questionable” because they primarily benefit a single individual. That language signals the compliance scrutiny these plans attract. The main ongoing requirement is filing Form 5500 or 5500-EZ every year to report on the retirement plan. Some ROBS promoters have incorrectly told plan sponsors they are exempt. They are not. The one-participant plan exception that waives Form 5500-EZ for plans under $250,000 does not apply to ROBS, because the plan owns the business through its stock rather than the individual owning it directly.9Internal Revenue Service. Rollovers as Business Start-Ups Compliance Project
If the business fails, you lose your retirement savings with no tax deduction to soften the blow. That is the core risk, and it is worth sitting with before committing.
Home Equity and Brokerage Lines
A home equity line of credit turns your home’s equity into available cash, usually at rates lower than unsecured business loans. Securities-backed lines of credit work similarly, letting you borrow against a non-retirement brokerage account without selling the underlying investments. Both deliver quick liquidity, and both tie personal assets directly to the business outcome. If the acquisition underperforms, you are not just dealing with a struggling business, you are potentially losing your home or watching your portfolio get liquidated to cover the shortfall. These belong in a funding stack, not as the whole plan.
Earnouts as a Financing Bridge
An earnout structures part of the purchase price as contingent payments tied to future performance. You might pay $2 million at closing and agree to pay another $500,000 if the business hits a revenue target within two years. That reduces the upfront capital you need and shifts risk to the seller. If the business underperforms the projections that justified the asking price, you pay less.
Earnouts work well when buyer and seller disagree on valuation. Rather than walking away, both sides agree on a base price and let actual results determine the final number. The catch is ongoing entanglement during the measurement period. Disputes over whether the buyer deliberately suppressed revenue or changed accounting practices to avoid triggering payments are common and ugly. Define the performance metrics, measurement period, and accounting methodology with real precision in the purchase agreement. Vague earnout language is a lawsuit waiting to happen.
Documentation You’ll Need
Whether you are applying for an SBA loan, approaching a bank, or pitching investors, the documentation package is substantial and takes longer to assemble than most buyers expect. Start weeks before you need it.
- Personal financial statement. SBA applicants use Form 413, which catalogs assets (real estate, retirement accounts, investments) and liabilities (mortgages, car loans, student debt) to calculate net worth.10U.S. Small Business Administration. Personal Financial Statement (SBA Form 413)
- Borrower information form. SBA Form 1919 collects details about the applicant, the loan request, existing debts, and any prior government financing.11U.S. Small Business Administration. SBA Form 1919 Borrower Information Form
- Tax returns. Two to three years of personal federal returns and the target business’s returns for the same period. Lenders want the full returns and the schedules, especially K-1s showing actual distributions.
- Business plan. A post-acquisition plan covering projected revenue, operational changes, and staffing for at least the first 24 months. Underwriters use it to judge whether you understand the business you are buying.
- Valuation report. A formal appraisal from a qualified professional that supports the asking price. Lenders will not take the seller’s word for what the business is worth.
- Letter of intent. A signed document showing both parties have agreed on basic deal terms. Without it, most lenders will not begin processing.
For larger acquisitions, lenders or investors may also require a quality of earnings report from an independent accounting firm. A QofE goes beyond standard financial statements to normalize earnings by stripping out one-time events, above-market owner compensation, and other items that distort real profitability. It is where the add-backs underwriters care about get professionally verified rather than taken on the seller’s word. If you are spending over $1 million on a business without a QofE, you are taking the seller’s accounting on faith.
Deal Structure Changes the Cost of Your Debt
How you structure the acquisition, buying the company’s assets versus buying ownership shares, has tax consequences that directly affect how much of your purchase price you recover through depreciation and amortization. In an asset purchase, you get a stepped-up tax basis in everything you acquire, so you can depreciate the assets based on what you actually paid rather than the seller’s old book value. That means larger deductions in the early years of ownership, which is when your loan payments are highest.
A stock purchase generally does not step up the basis of the underlying assets without additional elections under Sections 338 or 336(e), which carry their own tax costs. For buyers of pass-through entities like LLCs taxed as partnerships, buying all of the membership interests is typically treated as an asset acquisition for tax purposes, giving you the step-up automatically. If you are buying only a partial interest, the partnership needs a Section 754 election in place for you to get a basis adjustment on your share.
Both buyer and seller must allocate the purchase price among the acquired assets using the residual method under Section 1060, and both are bound by any written allocation agreement they sign.12Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions The allocation determines how much of the price lands on depreciable equipment versus goodwill versus inventory, so negotiate it carefully. What benefits the buyer usually costs the seller.
If you are taking on significant debt, know that your interest deductions may be capped. Section 163(j) limits the business interest expense deduction to 30% of the company’s adjusted taxable income for the year.13Internal Revenue Service. IRS Updates FAQs on Changes to the Limitation on the Deduction for Business Interest Expense For tax years beginning in 2026, ATI is calculated using a tax-basis EBITDA approach, so depreciation and amortization are added back before applying the 30% cap. That is more favorable than the EBIT-based calculation that applied from 2022 through 2024. Disallowed interest carries forward.
Small businesses with average annual gross receipts of $30 million or less over the prior three years are generally exempt from the 163(j) cap. For a larger acquisition, though, the limit can meaningfully reduce how much of your acquisition-debt interest you deduct in the early years, exactly when the payments are heaviest. Factor that into the real after-tax cost of each dollar of debt in your stack.