The equity injection is on project cost, not price
SBA rules require an equity injection of at least 10% of total project cost on a change of ownership. Total project cost is not the purchase price - it includes post-closing working capital, closing costs, and the guarantee fee. Buyers who budget 10% of the price routinely arrive at closing short.
Lenders also want to see reserves left over. A buyer who puts in their last dollar is a weaker credit than one who retains six months of personal living expenses, at an identical injection percentage.
The standby seller note trap
A seller note can count toward the equity injection only if it is on full standby for the entire life of the SBA loan - the seller receives nothing, not principal, not interest, for up to ten years - and it is capped at half the required injection.
Sellers routinely agree to 'hold paper' during negotiation and then withdraw once their attorney explains what full standby means. Raise it explicitly at the letter-of-intent stage. A deal built on a seller note that turns out not to qualify has to be re-cut from the beginning.
The valuation can end the deal
SBA lenders require an independent business valuation on change-of-ownership loans above a threshold, and it is ordered after you have agreed a price. If it comes in below the agreed number, the lender will finance against the lower figure - leaving the buyer to bridge the gap in cash, renegotiate, or walk.
Goodwill-heavy deals attract more scrutiny than asset-heavy ones, because in a default the recovery on goodwill is nothing.
Asset purchase versus stock purchase
Most SBA-financed acquisitions are asset purchases: the buyer takes the assets and leaves the seller's liabilities behind, and gets a stepped-up basis for depreciation. Stock purchases are financeable but raise successor-liability questions that lenders examine closely, and they are often driven by non-transferable contracts, licences, or leases.
The tax consequences differ substantially for both sides and are frequently the real subject of the negotiation. This is a question for a transaction attorney and an accountant, not for a website.
What underwriters look for in the target
Three years of tax returns that reconcile to the financials. Customer concentration - a business where one client is 40% of revenue is a different credit from one with two hundred customers. Whether the earnings survive the owner's departure, which is the central question in any owner-operated business. And whether the buyer's experience is relevant to the industry.
Seller-claimed add-backs that are not visible in the tax return rarely survive underwriting. The SBA rules let a lender make justified adjustments to the business's cash flow, documented in its credit memo, but an add-back nobody can trace to the records is the most common reason a deal reprices during underwriting.
What the data shows about acquisition lending
Acquisition loans tend to sit at the larger end of the 7(a) distribution and to carry ten-year terms unless real estate is involved, in which case they stretch to twenty-five. Lenders with heavy acquisition volume behave differently from working-capital lenders: their medians are larger, their processes slower, and their underwriters far more used to reading a target's books.
Our lender profiles show median loan size and processing methods, which together are a reasonable indicator of whether a lender does this work routinely.
Questions
- How much cash do I need to buy a business with an SBA loan?
- At least 10% of total project cost as equity, plus closing costs and post-closing reserves. A seller note on full standby can supply at most half of that 10%, so for an Initial Acquisition at least 5% of total project cost has to come from cash or another source the rules do not limit. On a $1.2 million purchase with working capital and fees, that commonly means $130,000 or more in genuine cash, less any qualifying standby seller note.
- Can I buy a business with no money down using an SBA loan?
- No. The equity injection requirement is a rule, not a lender preference, and the sources that can satisfy it are constrained. Offers to structure around it should be treated with considerable suspicion.
- Does the seller have to stay on after closing?
- For an Initial Acquisition or a Business Expansion, the seller may not stay on as an officer, director, stockholder or employee. The SOP allows a transitional consulting arrangement of up to 24 months in total.