Most first-time buyers assume they need $300K+ in cash to acquire a business.
They need half that—sometimes less.
The gap isn't capital. It's knowing how SBA lenders structure deals.
The buyers who close transactions understand this: the SBA 7(a) program allows you to assemble the required 10% equity injection from multiple sources, roll transaction costs into the loan, and use seller alignment to reduce cash at closing.
Here's how to structure an SBA acquisition to minimize upfront cash—while maintaining adequate capital buffers for operations.
How SBA Loan Structure Actually Works
The SBA requires 10% equity injection into every deal.
What most buyers don't realize: you can satisfy that 10% using buyer cash, seller notes, and investor equity.
The lender cares about:
Total equity ≥10%
DSCR ≥1.25x (cash flow covers debt with cushion)
Buyer meets SBA credit standards (typically 680+)
Structure #1: The 5/5/90 Split (Use a Seller Note for Half Your Equity)
What it is: 5% buyer cash + 5% seller standby note + 90% SBA loan.
Why lenders approve it: Total equity = 10%. Seller has skin in the game. The standby note is subordinated to the lender.
The fine print: The seller note must be on full standby—no payments until the SBA loan is fully repaid or the business maintains DSCR ≥1.25x.
Example:
Purchase Price | Buyer Cash | Seller Note (Standby) | SBA Loan |
|---|---|---|---|
$3,000,000 | $150,000 (5%) | $150,000 (5%) | $2,700,000 (90%) |
$2,000,000 | $100,000 (5%) | $100,000 (5%) | $1,800,000 (90%) |
What to ask your lender: "We're structuring this with 5% buyer equity and 5% seller note on full standby. What subordination terms do you require?"
Structure #2: The Forgivable Seller Note (Risk-Share Early Performance)
What it is: A portion of the seller note is forgiven if the business underperforms against specific metrics in the early years.
Why this matters: This protects you during the risky transition period when revenue or customer retention may dip. If performance drops, the debt is forgiven. If the business does well, you pay the note as agreed.
Why lenders approve it:
Reduces buyer's debt burden if business underperforms
Aligns seller incentives to ensure clean handoff
Seller only gets paid if the business maintains performance
The structure: The seller agrees to forgive part or all of their note if:
Revenue falls below a threshold during Year 1-2
Key customer contracts don't renew
EBITDA drops below historical levels
Management team doesn't stay
The Key: Must be definitive and verifiable metrics.
Example:
Purchase Price: $3M
Buyer cash: $150K (5%)
Seller note: $150K (5%), structured as:
$100K forgiven if revenue drops >15% in first 18 months
$50K payable in Year 6-10 if performance targets are met
What to ask your lender: "We'd like downside protection through performance-based forgiveness in the seller note. What conditions would you need documented?"
LOI language: "$[X] of the seller note shall be forgiven if [specific underperformance conditions]. If performance thresholds are met, balance payable beginning Year 6."
Structure #3: Finance Working Capital and Closing Costs Into the Loan
What it is: The SBA loan finances more than the purchase price—include working capital, transaction costs, and fees.
What you can finance: Working capital (12-18 months), SBA guarantee fee (3-3.75%), valuation ($5K-15K), environmental reports, legal fees, and QofE reports.
The math:
Traditional | SBA-Optimized |
|---|---|
$150K down | $150K down (5% + 5% seller note) |
$75K working capital | $100K working capital (financed) |
$25K closing costs | $25K closing costs (financed) |
$250K cash | $150K cash |
What to ask your lender: "We'd like to include $[X] in working capital and $[Y] in transaction costs. What documentation do you need?"
Structure #4: Include Working Capital in the Purchase Price
What it is: Negotiate for net working capital to be included in the purchase price, not paid separately.
LOI language: "Purchase price includes normalized working capital sufficient to operate the business post-close. Working capital normalized to $[X] based on trailing 12-month average, with dollar-for-dollar adjustment at closing."
This prevents needing an additional $50K-200K post-close for A/R, inventory, and operating cash.
Structure #5: Use Investor Equity Without Losing Control
What it is: Bring in capital structured as preferred equity with no voting rights.
The structure:
Class A (Buyer): Voting control, operational authority
Class B (Investors): No voting rights, 10-15% preferred return, priority liquidation
Example:
Purchase Price: $3M | |
|---|---|
Buyer cash | $100,000 (3.3%) |
Investor equity | $200,000 (6.7%) |
SBA Loan | $2,700,000 (90%) |
Investors get 12% annual return + redemption in Year 5. You keep control.
What to ask your lender: "We're bringing $[X] in non-voting preferred equity. What documentation confirms this counts toward our equity injection?"
Structure #6: Protect your personal asset risk with Personal Guarantee Insurance
The worry: "If this business fails, could I lose my house? Are my spouse's assets at risk?"
The reality: Every SBA loan requires a personal guarantee. That means if the business can't repay the loan, you're personally liable.
But writing a bigger equity check doesn't reduce that exposure—it just means you lose more of your own capital first.
The principle: Writing a bigger check doesn't reduce risk. Protecting your assets does.
What's Actually At Risk
When you sign an SBA personal guarantee, the lender can pursue:
Your personal bank accounts
Your investment accounts
Your home (in most states, with exceptions)
Your spouse's assets (in community property states)
The worst case: Business fails, you can't repay the loan, lender pursues personal assets, potential personal bankruptcy.
Emerging New Product: Personal Guarantee Insurance
A new insurance product is emerging that covers your personal guarantee exposure:
How it works:
Pays the lender if your business defaults and you can't cover the PG
Costs 1.5-3% of the loan amount annually
Covers 50-100% of PG exposure
When it's available: Currently available in the UK, expected to launch in the US in early 2026.
Join the waitlist at → ebitinsurance.com
The Complete Capital Stack: A $3M Example
Component | Amount | % | Notes |
|---|---|---|---|
Buyer Cash | $100,000 | 3.3% | Out-of-pocket |
Investor Equity | $150,000 | 5.0% | Preferred return |
Forgivable Seller Note | $150,000 | 5.0% | Forgiven if metrics miss |
Working Capital (financed) | $100,000 | 3.3% | In SBA loan |
Closing Costs (financed) | $30,000 | 1.0% | In SBA loan |
SBA Loan | $2,470,000 | 82.3% | 10-year note |
Total | $3,000,000 | 100% |
Cash Required: $100K
If the business generates $600K EBITDA:
Debt service: ~$350K/year
Available cash: $250K for salary, investor return, and operating buffer
Capital Stack Checklist
Equity (10% minimum):
Buyer cash: _____%
Seller note (standby): _____%
Investor equity: _____%
Forgivable provisions: Yes / No
Financed into loan:
Working capital, SBA fee, valuation, legal, diligence
Purchase agreement:
Normalized working capital in price
Seller note subordination
Forgiveness conditions
Risk management:
PG insurance evaluated
DSCR projected ≥1.25x
Why Capital Efficiency Matters (But Buffers Matter More)
Private equity minimizes equity and maximizes leverage—within prudent limits.
The reason: equity is expensive capital.
Every dollar you don't put into the acquisition is a dollar available for:
Post-close working capital
Transition costs
Unexpected expenses
Future acquisitions
Critical note: Minimizing upfront equity is smart. But you must have adequate capital buffers once you own the business.
Buying a business involves:
Transition costs (systems, processes, learning curve)
Unexpected expenses (equipment, customer issues, market changes)
The J-curve (cash flow often dips before improving)
Structure your deal to minimize cash at closing. But ensure you have 3-6 months of operating expenses in reserve post-close.
This isn't about being reckless. It's about being strategic with capital allocation.
FAQ: SBA Loan Structure
Can a seller note satisfy the SBA equity injection? Yes. Up to 5% of the 10% requirement can come from a seller note on full standby, subordinated to the lender.
Can SBA loans finance working capital and closing costs? Yes. Working capital, the SBA guarantee fee, appraisal, environmental reports, and legal fees can all be included in the loan.
What is a forgivable seller note? A seller note where the debt is forgiven if the business underperforms during the transition. If performance meets targets, the note is paid as agreed. This aligns seller incentives for a clean handoff.
Do I need a 680+ credit score? Most SBA lenders prefer 680+, though some work with 650+ if other factors are strong.
Does a larger down payment reduce my personal guarantee? No. The PG is tied to the loan amount, not your equity. Personal guarantee insurance is emerging as a way to reduce downside risk (waitlist at ebitinsurance.com).
What DSCR do lenders require? Minimum 1.25x, but some lenders look for 1.50x+
Disclaimer: This guide is for educational purposes only and does not constitute legal, financial, tax, or investment advice. Business acquisitions involve significant risks, and outcomes can vary widely based on individual circumstances. Always consult with qualified professionals including attorneys, CPAs, and financial advisors before making acquisition decisions. The EBIT Community does not guarantee the accuracy of information provided or the success of any acquisition strategy. Past performance and examples do not guarantee future results.
