Why Buy Instead of Build?
Building a business from zero requires years of customer acquisition, brand development, systems building, and cash burn before reaching profitability. Acquiring an existing business lets you skip the startup phase entirely, purchasing established revenue, customers, employees, equipment, and brand equity on day one.
The numbers support this approach. According to BizBuySell data, the median acquisition of a small business provides immediate annual revenue of $400,000 to $600,000 and cash flow of $80,000 to $150,000. Building this level of revenue organically typically takes 3 to 5 years and requires significant upfront investment with no guarantee of success.
Acquisitions also provide strategic advantages beyond the financial: entering new markets, acquiring specific capabilities or technologies, eliminating competitors, and achieving economies of scale. Industries like professional services, healthcare, and manufacturing are particularly active in acquisition-driven growth.
Acquisition Financing Options
| Source | Typical Coverage | Rate | Term | Best For |
|---|---|---|---|---|
| SBA 7(a) | Up to 90% of purchase price | Prime + 2.25% - 4.75% | 10 - 25 years | Acquisitions under $5M |
| Seller Financing | 10% - 100% (avg 30-50%) | 5% - 10% | 3 - 7 years | Bridging equity gaps, flexible deals |
| Conventional Bank | 60% - 80% | 6% - 12% | 5 - 10 years | Larger acquisitions, strong buyers |
| Asset-Based Lending | 50% - 80% of asset value | 8% - 18% | 3 - 7 years | Asset-heavy businesses |
| Earnout | 10% - 30% of price | 0% (contingent) | 1 - 3 years | Bridging valuation disagreements |
The Most Common Structure
The majority of small business acquisitions use a combination of financing sources. A typical deal might look like: SBA 7(a) loan covers 70% of the purchase price. Seller financing covers 20%. Buyer equity injection covers 10%. This layered approach gives the buyer maximum leverage while providing the seller with both immediate cash and ongoing payments.
Structuring the Deal
Asset Purchase vs. Stock Purchase
In an asset purchase, you buy the business's assets (equipment, inventory, customer lists, intellectual property, goodwill) but not the legal entity itself. In a stock purchase, you buy the owner's shares in the company, acquiring the entity with all its assets and liabilities. Over 90% of small business sales are structured as asset purchases because they provide better tax treatment for the buyer and limit liability exposure.
Earnout Provisions
An earnout ties a portion of the purchase price to the business's post-acquisition performance. If revenue or profit meets agreed targets over 1 to 3 years, the seller receives additional payments. Earnouts bridge valuation gaps: the seller believes the business is worth $1.2 million; the buyer believes it is worth $900,000. An earnout at a base price of $900,000 with up to $300,000 in performance-based payments satisfies both parties.
Transition and Training
Most acquisition agreements include a transition period (typically 30 to 90 days) where the seller stays on to train the buyer, introduce key customers, and transfer institutional knowledge. Some deals structure the seller as a consultant for 6 to 12 months post-close. This transition is critical for maintaining customer relationships and operational continuity.
Understanding Business Valuation
Business valuation determines how much you should pay, which directly drives the financing structure.
Common Valuation Methods
- Seller Discretionary Earnings (SDE) Multiple: Most common for businesses under $1M in revenue. SDE = net profit + owner salary + owner perks + one-time expenses. Applied multiple: 2x to 4x depending on industry and risk profile.
- EBITDA Multiple: Standard for larger businesses. EBITDA = earnings before interest, taxes, depreciation, and amortization. Applied multiple: 3x to 6x for most industries.
- Asset-Based Valuation: Sum of tangible and intangible asset values. Used when the business is worth more as a collection of assets than as an ongoing operation.
- Discounted Cash Flow (DCF): Projects future cash flows and discounts them to present value. More sophisticated but highly sensitive to assumptions.
Financial Due Diligence
Never acquire a business without thorough financial due diligence. Verify every number the seller presents.
Critical Items to Verify
- Tax returns vs. internal financials: Discrepancies between filed tax returns and the financials presented during the sale process are a major red flag. Tax returns are filed under penalty of perjury; internal financials are not.
- Revenue quality: What percentage of revenue is recurring vs. one-time? How concentrated is revenue across customers? Losing a customer that represents 30% of revenue could devastate the business post-acquisition.
- Working capital normalization: Ensure the business will be transferred with adequate working capital to operate. Many deals fail post-close because the seller stripped working capital before the transaction.
- Liabilities and contingencies: Pending lawsuits, environmental issues, tax disputes, and warranty obligations can create post-close surprises. Your attorney should review all potential liabilities thoroughly.
- Employee and customer retention risk: Key employees and major customers may not stay after ownership changes. Assess this risk and plan mitigation strategies.
SBA Loans for Acquisitions
The SBA 7(a) program is the most popular financing vehicle for small business acquisitions, covering up to 90% of the purchase price with terms up to 25 years.
SBA Acquisition Requirements
- Buyer must have relevant industry experience or a management team that does
- Equity injection: Minimum 10% from the buyer (can include seller financing on standby)
- The business must be profitable and demonstrate DSCR of 1.15x or better post-acquisition
- Full change of ownership (buyer must own 100%)
- Purchase price must be supported by an independent business appraisal
- Personal guarantee required from all owners with 20%+ stake
Seller Financing as Equity
An important detail: the SBA allows seller financing to count toward the buyer's equity injection if the seller note is on full standby for the first two years (no payments). This means a buyer with limited cash can satisfy the 10% equity requirement using a seller note rather than personal savings, dramatically increasing accessibility.
From LOI to Close
- Letter of Intent (LOI): Submit a non-binding offer outlining purchase price, terms, and contingencies. This typically includes an exclusivity period (30 to 90 days) during which the seller cannot negotiate with other buyers.
- Due diligence: Conduct thorough financial, legal, and operational review. Engage an accountant, attorney, and potentially a business appraiser.
- Financing application: Submit your loan application with the LOI, business financial records, your personal financial statement, and business plan showing post-acquisition projections.
- Appraisal: The lender orders an independent business valuation to confirm the purchase price is supportable.
- Loan commitment: The lender issues a commitment letter outlining approved terms, conditions, and closing requirements.
- Purchase agreement: Attorneys draft the definitive purchase agreement, incorporating all negotiated terms, representations, and warranties.
- Closing: Sign documents, transfer funds, and take ownership. The seller typically stays for a transition period.
Acquiring a business is one of the most complex financial transactions an entrepreneur undertakes. Professional guidance makes the difference between a deal that transforms your future and one that becomes a burden. Sunsurf Capital specializes in acquisition financing and can guide you through every step.