Which SBA program to use
For nearly all business acquisitions, the right product is SBA 7(a). It can finance 100% of the acquisition price (minus your equity injection), covers goodwill and intangibles, and accommodates mixed-use structures (business + real estate + working capital).
SBA 504 only applies when the acquisition includes significant commercial real estate — and even then, it's typically used alongside a 7(a) for the non-real-estate portions. SBA Express caps at $500K, which puts it out of range for most acquisitions.
Expect your acquisition to be structured as a 7(a) loan unless you're doing a deal with a large real estate component where splitting into 504 + 7(a) makes sense.
Loan amounts and terms
- Maximum loan amount: $5 million (SBA 7(a) ceiling)
- Typical repayment term: 10 years for the business acquisition portion
- Extended term for real estate: up to 25 years if real estate is included
- Interest rate: typically Prime + 2.25% to 4.75% (variable); 2026 range approximately 10–13%
- Prepayment penalty: only on loans with 15+ year terms (declining: 5%, 3%, 1% in first three years)
The 10-year term is the key feature. Most seller financing runs 3–5 years at balloon; SBA gives you fully-amortized 10-year terms at materially lower rates.
The equity injection requirement
SBA requires a minimum equity injection on acquisitions. As of 2026, the standard is 10% of the total project cost, which includes the purchase price plus any working capital funded.
Critical nuance: the equity injection can come from multiple sources, but the sources are scrutinized:
- Cash savings: fully acceptable, no questions beyond sourcing verification
- 401(k) rollover (ROBS): acceptable, structured through an established provider
- Seller note on standby: can count toward equity injection if structured correctly — typically must have no payments for the first 2 years and be fully subordinated to the SBA loan. A standby seller note can cover up to half (5%) of the 10% requirement in many cases.
- Gift from family: acceptable with a documented gift letter
- Another loan: generally NOT acceptable — borrowing your equity injection defeats the "skin in the game" purpose
- HELOC on personal residence: gray area; some lenders allow it, many don't
Negotiating a seller note on full standby for 2+ years can reduce your cash equity requirement from 10% to 5% of the project cost. On a $1M acquisition, that's $50,000 in cash freed up — which often means the difference between doing the deal and walking away. Most SBA lenders accept properly structured standby notes as partial equity.
What buyers need to qualify
Beyond standard SBA requirements, acquisition buyers face additional scrutiny:
Personal credit
680+ FICO is the practical floor. 700+ is strong. Lower scores are possible with exceptional industry experience and conservative deal metrics.
Industry experience
This is the single biggest differentiator between approved and declined acquisition loans. Lenders want to see direct experience in the target industry — ideally 3–5 years in a similar role. A first-time buyer with no industry experience will struggle.
Acceptable substitutes for direct industry experience:
- Proven general management experience in an analogous industry
- A qualified key employee (ideally the seller) staying on with a documented transition agreement
- A strong partner with direct industry experience
- An operations role with a recognized franchise system for franchise acquisitions
Personal financial strength
Liquid assets (cash, brokerage, retirement) of at least 25% of the loan amount typically expected. Minimal consumer debt. Positive net worth outside the business being acquired.
Management plan
A written plan showing how you'll run the business, retain key employees, transition customer relationships, and manage through the first 12 months. Lenders read this carefully.
What the target business needs to qualify
The business being acquired also has to meet SBA standards:
Financial performance
- 3 years of tax returns showing consistent or growing revenue
- Positive cash flow — the business must generate enough SDE (seller's discretionary earnings) or EBITDA to service the proposed debt with a DSCR of 1.25+
- No pending litigation or material adverse events
- Clean tax filings — no unresolved IRS issues, no discrepancies between tax returns and internal financials
Customer concentration
Businesses with a single customer >20% of revenue trigger additional scrutiny. >40% from one customer can be a deal-killer unless there's a long-term contract in place.
Eligible industry
The target must be an SBA-eligible industry (see SBA requirements article). Some industries (restaurants, gas stations, hotels) are eligible but require lenders with specific industry expertise.
Deal structures: asset vs. stock
Business acquisitions are typically structured as either asset purchases or stock purchases. SBA has strong opinions on both.
Asset purchase (preferred by SBA)
You buy the specific assets of the business (equipment, inventory, customer lists, goodwill) rather than the legal entity. The seller's historical liabilities generally don't transfer.
SBA advantages: Cleaner collateral picture, no inherited liabilities, more common. Most SBA acquisitions are asset purchases.
Stock/equity purchase
You buy the seller's shares, taking ownership of the entire legal entity with all assets, liabilities, and contracts intact. Required when specific contracts, licenses, or customer relationships are non-assignable.
SBA considerations: Allowed but with restrictions. Additional due diligence required. Personal guarantee from all 20%+ owners of the new entity. Lender may require environmental phase I or other additional reports.
The goodwill financing rules
Here's where acquisitions get technical. The SBA allows financing of goodwill (the portion of purchase price above tangible asset value), but with specific limits:
- Goodwill up to $500,000 can be financed without special treatment
- Goodwill exceeding $500,000 triggers additional equity requirements
- Specifically: if goodwill > $500K, buyer equity plus seller standby note must equal at least 25% of the purchase price
This matters because small business acquisitions are often priced at 3–5x SDE with minimal tangible assets. A $2M acquisition of a services business might include $1.8M in goodwill — which pushes you into the 25% equity requirement structure.
Model your acquisition scenario
Our specialists run the equity injection math, goodwill analysis, and DSCR calculation on your specific deal — before you commit to an LOI.
The acquisition timeline
From LOI to close, expect 90–120 days. Here's the typical sequence:
- Weeks 1–2: LOI signed, due diligence begins, SBA lender selected and pre-qualified
- Weeks 2–5: Formal SBA application submitted, business valuation ordered, quality of earnings review if deal >$1M
- Weeks 5–8: Underwriting, credit committee review, commitment letter issued
- Weeks 8–12: Closing conditions satisfied — final financials, UCC searches, asset transfer agreements
- Weeks 12+: Funding and closing, business transfer, transition period begins
Quality of earnings review is a critical step often overlooked. For deals over $1M, SBA lenders typically require an independent Q of E from an accounting firm. Budget $8,000–$25,000 and 3–4 weeks for this step.
What sellers need to provide
The SBA process puts significant obligations on the seller as well. They'll need to provide:
- 3 years of business tax returns plus YTD financials
- Complete customer list and revenue concentration analysis
- All major contracts (customer, supplier, lease)
- Employee rolls and compensation details
- Equipment/asset list with conditions and values
- Inventory counts and valuation methodology
- Litigation disclosure
- Environmental disclosures (especially if real estate involved)
- Transition support agreement (most SBA deals require 30–90 days)
- Non-compete agreement (standard, typically 2–5 years within geographic area)
Red flags that kill acquisition loans
Based on what we've seen decline at the credit committee stage:
Seller-provided financials don't tie to tax returns
The #1 killer. If the seller's P&L shows $400K SDE but the tax return supports only $230K, the lender uses the tax return. This often destroys the deal economics.
Customer concentration >40% in single customer
Especially problematic if that customer is on a short-term contract or month-to-month basis.
Owner-dependence without succession
If the seller IS the business — all customer relationships, all key vendor contacts, all technical expertise — the deal requires an extended transition arrangement or special key-person insurance.
Declining industry or declining business
Both are deal-killers. A 15% revenue decline year-over-year, even with strong profits, triggers heavy scrutiny.
Buyer can't explain the industry
Lenders interview buyers. If you can't explain the competitive landscape, key operating metrics, or typical customer buying cycle, your application weakens.
Undocumented cash in the business
"The owner takes $60K per year in cash that isn't on the tax return." Lenders cannot lend based on undocumented income. This often reveals the business is priced on unfiled earnings — which means the listing price is fiction.