Acquisition is the use case the 7(a) program handles better than anything else in commercial credit. A conventional lender will not amortize goodwill over ten years, because goodwill is not collateral and it does not exist if the business stops operating. The federal guaranty is what makes that loan possible, and it is the reason most small-business purchases in this country are financed the way they are.
The underwriting question, though, is not about you. It is about the target: does the business you are buying generate enough cash, consistently enough, to service the debt that is about to be placed on it while paying you a living. Buyers spend most of their preparation time on their own credentials. Analysts spend most of their time on the seller's tax returns.
How the desk underwrites an acquisition
The model starts with the target's historical financials, usually three years of tax returns plus current interim statements. The analyst normalizes them: adds back the seller's excess compensation and documented personal expenses, removes non-recurring items in both directions, and subtracts a market-rate salary for whoever will run the business after closing, which is often you.
That normalized figure is divided by the post-closing debt service, including the new SBA payment, any seller note that is not on standby, and any obligations of the target that survive the transaction. The resulting coverage ratio governs the loan size, and it is where most acquisition files either work or do not.
The equity injection
Change-of-ownership transactions carry a minimum borrower injection expressed as a percentage of total project cost: commonly ten percent under current rules, though lenders frequently require more. Total project cost is the important phrase: it includes the purchase price plus working capital, closing costs and fees, not just the price on the purchase agreement.
The injection must be the buyer's own equity, and its source gets verified. Cash from savings, a documented gift, proceeds from selling an asset, and certain retirement rollover structures are all commonly used. Borrowed funds generally do not count unless repayment can be made from a source other than the business cash flow, because a personal loan repaid by the business is just more debt service in disguise.
Under current rules, properly structured seller debt on full standby can satisfy a portion of the required injection: typically no more than half, and only where the seller note requires no principal or interest payments for a defined initial period. The details of this rule have been revised more than once, so confirm the standard in effect before you build a term sheet around it.
Seller notes, earnouts and standby
Seller financing does more than bridge a funding gap. It keeps the seller economically interested in a smooth transition, and analysts read it as a confidence signal. There are three configurations, and the distinction matters a great deal to your coverage ratio.
| Structure | Payments during standby | Effect on coverage |
|---|---|---|
| Full standby | No principal or interest for the standby period | Excluded from debt service; may count toward part of the injection |
| Interest-only standby | Interest paid, principal deferred | Interest counts in debt service; usually cannot count toward injection |
| Fully amortizing seller note | Full principal and interest from closing | Counts fully in debt service and reduces the SBA loan you can support |
| Earnout tied to performance | Contingent on future results | Treated cautiously; structure must not create hidden mandatory debt service |
The practical consequence is that a seller note is not free money. A fully amortizing note lowers the SBA loan the business can support, dollar for dollar of debt service. A full standby note does not. If the seller is willing to carry paper, the standby structure is worth far more to the transaction than a slightly higher note rate costs.
Valuation and the appraisal of the business
When the financed amount attributable to goodwill and intangibles exceeds a stated threshold, an independent business valuation is required, ordered by the lender from a qualified third party. It is also required where the buyer and seller have a close relationship. The purpose is not to second-guess your negotiation. It is to confirm that the loan is not advancing more than the business is worth.
If the valuation comes in below the purchase price, the deal does not automatically die. The usual paths are a price reduction, a larger buyer injection, or additional seller financing on standby to bridge the difference. Anticipating this is why experienced buyers build a valuation contingency into the purchase agreement.
What buyers get wrong
The most expensive mistake is signing a purchase agreement with a fixed price and a short closing window before anyone has modeled coverage. If the business supports $1.1M of debt and you agreed to pay $1.5M with ten percent down, the gap has to come from somewhere, and by then you have limited negotiating room and a deadline.
Working capital and the buyer's experience
The second common mistake is treating working capital as an afterthought. A business bought without operating cash is a business that runs out of money in month three, when receivables have not yet cycled and the seller's vendor relationships are being re-established. Build working capital into the request from the beginning: it is an eligible use, and adding it later is a new loan.
The third is relevant experience. Underwriting weighs whether the buyer can actually run this business. A buyer with directly applicable operating experience, or a retained key manager, or a defined transition period with the seller, presents a materially different file from one with none of the three.
The acquisition document set
What an acquisition file needs beyond the standard package
- Signed purchase agreement with a purchase price allocation across assets, equipment, real estate and goodwill.
- Three years of the target's business tax returns plus current year-to-date financials.
- Target's interim balance sheet, aged receivables and aged payables.
- Target's debt schedule, showing which obligations are being assumed and which paid at closing.
- Letter of intent or agreement terms for any seller note, including standby provisions.
- Buyer resume documenting operating experience relevant to this specific business.
- Source of injection: statements evidencing the funds and how long they have been held.
- Transition plan with the seller: duration, scope and whether it is compensated.
- Customer concentration analysis if any single account is a material share of revenue.
- Copy of the premises lease and confirmation the landlord will assign or issue a new lease.
How much of my own money do I need to buy a business?
Current rules set a minimum injection as a share of total project cost, commonly ten percent, and individual lenders often require more depending on the sector and the buyer's experience. Part of that requirement can sometimes be met with properly structured seller debt on full standby. Plan for the higher end rather than the minimum, and remember that total project cost includes working capital and closing costs.
Can I buy only part of a business?
Partial changes of ownership are permitted under current rules with conditions attached, and those conditions have been revised more than once in recent years. Because the treatment of remaining owners, guaranties and standby obligations differs from a full buyout, confirm the current standard with your lender before you negotiate the structure.
Does the seller have to stay on after closing?
Not always, but a defined transition period strengthens the file considerably, especially where the seller holds the customer relationships or the operating knowledge. Underwriting reads a documented transition plan as risk mitigation. If the seller is unwilling to stay in any capacity, expect more scrutiny of the buyer's experience.
What if the business owns its building?
A 7(a) loan can fund the business and the real estate in one note, with the maturity blended across the two uses in proportion to the dollars. The alternative is splitting the transaction, financing the real estate under 504 and the operating business under 7(a), which can produce a better blended cost but requires two closings and a cooperative seller.
Can I use retirement funds for the injection?
Structures that let a buyer use retirement assets for an equity injection exist and are used regularly, but they have specific compliance requirements and ongoing obligations. They are worth discussing with both your lender and a qualified tax adviser before you rely on those funds as your source, because the structure has to be set up correctly before closing.
How is the purchase price allocation used in underwriting?
The allocation across equipment, real estate, inventory and goodwill drives both the collateral analysis and the maximum maturity of the loan. A goodwill-heavy allocation generally means a shorter term and a higher payment, while real estate in the allocation extends the maturity. It also has tax consequences for both parties, which is why it is negotiated rather than assumed.
What if the target's books are a mess?
It is common, and it is survivable if the bank statements support the story. Analysts reconcile deposits against reported revenue and will work from statements where the books are unreliable. What is not survivable is a target whose deposits do not come close to supporting the earnings claimed in the listing, which is a valuation problem rather than a documentation one.
Where to start
Before you sign anything, build the coverage model on the target's own numbers: normalized cash flow, minus a market salary for whoever runs it, divided by the debt service the deal will create. That single calculation tells you what price the business can actually carry, and it is far easier to negotiate before a purchase agreement exists than after.
Then get the seller's financial cooperation in writing as a term of the agreement, and start the file with the target's returns in hand. An acquisition request that arrives with the seller's numbers attached moves in a completely different way from one that does not.
Qualified Commercial Underwriting Desk
Credit and capital markets
The Qualified Commercial underwriting desk reviews commercial real estate, dealer and Main Street files daily. The Academy is written from that work (how files are actually read, priced and declined) rather than from a rate sheet.
Educational content only. Nothing here is a commitment to lend, an offer of credit, or tax, legal or accounting advice. Program terms, timelines and thresholds vary by lender, file and market conditions, and any figures shown are illustrative.