Financing a Business Acquisition
Seller financing, SBA loans, and creative deal structures for business buyers
Financing Options at a Glance
Seller Financing
Typical portion of deal
SBA 7(a) Max
Government-backed loans
Cash Discount
All-cash buyer advantage
Typical Terms
Seller note duration
Seller Financing: Foundation of Small Business M&A
The seller accepts a promissory note for a portion of the purchase price, getting paid over time from business profits. Most common form of small business financing.
Why Sellers Agree
- Tax deferral via installment sale
- Interest income (5-8%)
- Helps close deals faster
- Regular retirement income
- Business is collateral
Typical Terms
- Amount: 20-40% of price
- Interest: 5-8% (negotiable)
- Term: 3-7 years
- Security: Business assets
- Personal guarantee common
Example: $300,000 Business
SBA 7(a) Loans: The Foreign Investor Challenge
The SBA 7(a) program is popular but has strict eligibility. Foreign nationals face additional hurdles.
SBA Loan Basics
- Maximum: $5 million
- Down payment: 10-20%
- Rate: Prime + 2.25-2.75%
- Term: 10 years (acquisitions)
- Personal guarantee required
Foreign Buyer Options
- E-2 holders: Some lenders work with
- US citizen partner: 51%+ ownership
- After green card: Full eligibility
- Alternative: Heavy seller financing
All Cash Deals: Maximum Leverage
Cash buyers have the strongest negotiating position. Sellers value certainty of closing.
Cash Buyer Advantages
- 10-20% price discounts common
- Fastest closing timeline
- No financing contingency
- Seller certainty = motivation
- Compete against financed offers
Example: Cash Discount
- Asking price: $300,000
- Cash discount (15%): -$45,000
- Final price: $255,000
- Savings: $45,000
Combination Deals: Most Common Structure
Most deals combine cash, seller financing, and possibly bank debt. Creative structuring is an art.
Example: SBA + Seller Standby
Seller note on "standby" - payments start after SBA is partially paid.
Creative Deal Structures
Earnout Provisions
- Tie payment to future performance
- Bridge valuation gaps
- Reduce buyer risk
- Align incentives with seller
Training Agreements
- Seller stays 3-12 months
- Structure as consulting fees
- Tax-deductible for buyer
- Ensures smooth transition
Asset Carve-Outs
- Seller keeps real estate
- Lease back to business
- Reduces purchase price
- Seller stays invested
Working Capital
- Negotiate delivery amount
- Cash + inventory included
- Prevents cash drain
- Adjust at closing
E-2 Visa Financing Considerations
Financing for E-2 visa acquisitions requires careful structuring to meet immigration requirements.
What Counts as "At Risk"
- Cash paid at closing
- Seller financing with personal liability
- Personally guaranteed loans
- Irrevocably committed funds
Red Flags to Avoid
- 90% seller financing (marginal)
- Escrowed with refund rights
- Non-recourse financing
- Undocumented fund sources
Negotiating Financing Terms
Getting Seller to Finance
- Raise early in LOI stage
- Explain tax deferral benefits
- Offer personal guarantee
- Show financial capability
- Be flexible on other terms
Buyer Protections
- Right to prepay without penalty
- 30-60 day cure periods
- Subordination rights
- Offset for seller breaches
- No ongoing reporting required