How to Finance a Business Acquisition: The Complete 2026 Guide

Buying an existing business can be the fastest path to business ownership — you acquire established customers, revenue, employees, and operations from day one. But acquisition financing works differently than typical business loans.

This guide covers how to structure and finance a business acquisition, from SBA loans to seller financing and everything in between.

Why Buy an Existing Business?

Acquiring an existing business offers significant advantages over starting from scratch:

• Immediate Cash Flow: Revenue from day one versus months or years building up.
• Proven Model: The business model is already validated.
• Existing Customer Base: Built-in revenue stream to build upon.
• Trained Employees: Team already knows how to run operations.
• Established Suppliers: Vendor relationships are in place.
• Historical Financials: Real data to inform decisions and secure financing.

How Acquisition Financing Works

Acquiring a business typically requires a combination of financing sources:

• Down Payment: Your equity investment (typically 10–30% of purchase price).
• Senior Debt: Primary loan (often SBA) covering bulk of purchase price.
• Seller Financing: Seller carries a note for portion of price.
• Earnout: Contingent payments based on post-acquisition performance.

SBA 7(a) Loans for Acquisitions

SBA 7(a) is the most common acquisition financing source for small business purchases:

• Loan Amount: Up to $5 million
• Equity Required: Typically 10–20% buyer injection
• Interest Rates: Prime + 2.25% to 4.75%
• Term: Up to 10 years for acquisitions
• Collateral: Business assets, real estate if included, personal guarantee
• Seller Note Allowed: Yes, typically required to be on standby for 24 months

SBA loans are popular because they allow lower down payments than conventional bank financing, offer longer terms, and don't require outside collateral beyond the acquired business.

Seller Financing

Seller financing is when the seller extends a loan to the buyer as part of the purchase:

• Typical Amount: 10–30% of purchase price
• Interest Rate: Negotiable, often 5–8%
• Term: 3–7 years typical
• Structure: May be subordinated to bank debt (paid after senior lender)
• Standby Requirement: SBA loans require seller notes to be on standby (no payments) for first 24 months

Seller financing benefits both parties: buyers reduce cash needed at closing, and sellers often receive higher total sale price.

Earnouts and Contingent Payments

Earnouts tie portion of purchase price to post-acquisition performance:

• When Used: Bridge valuation gaps, align incentives, share risk.
• Typical Structure: Additional payments if business hits revenue or profit targets.
• Duration: 1–3 years post-closing.
• Considerations: Clear metrics, accounting definitions, and dispute resolution.

Earnouts reduce upfront financing needs but add complexity. Negotiate clear, measurable terms.

Other Financing Sources

Beyond SBA and seller financing, consider:

• Conventional Bank Loans: May require more equity (25–30%) but faster closing.
• 401(k) Business Financing (ROBS): Roll retirement funds into business equity tax-free.
• Home Equity: HELOC or home equity loan for down payment (use cautiously).
• Equipment Financing: Separate financing for equipment portion of purchase.
• Investor Partners: Silent partners provide equity in exchange for ownership stake.
• Family Loans: Document properly to avoid complications.

Typical Deal Structures

Here are common financing structures for different purchase prices:

What Lenders Evaluate

When underwriting an acquisition loan, lenders assess:

• Business Financials: 3+ years of tax returns, financial statements, cash flow analysis.
• Business Quality: Customer concentration, recurring revenue, industry trends.
• Purchase Valuation: Is the price reasonable based on cash flow and comparables?
• Buyer Qualifications: Credit history, net worth, industry experience.
• Management Transition: Plan for knowledge transfer and retention.
• Debt Service Coverage: Can the business support loan payments? (Target: 1.25x+)

The Acquisition Financing Process

Here's the typical process from finding a business to closing:

• Step 1: Identify target business and sign NDA.
• Step 2: Review seller-provided financials (CIM, tax returns).
• Step 3: Submit Letter of Intent (LOI) if interested.
• Step 4: Begin due diligence and start loan pre-approval process.
• Step 5: Complete due diligence, finalize purchase agreement.
• Step 6: Submit full loan application with purchase documents.
• Step 7: Loan underwriting and approval (4–8 weeks for SBA).
• Step 8: Closing — funds disbursed, ownership transfers.

Timeline: 90–180 days from LOI to closing is typical for financed acquisitions.

Common Acquisition Financing Mistakes

Avoid these errors:

• Inadequate Due Diligence: Verify everything before committing.
• Overpaying: Don't let emotion drive you to pay more than cash flow supports.
• Under-Capitalization: Keep cash reserves for working capital post-closing.
• Ignoring Transition Risk: Plan for knowledge transfer and customer retention.
• Missing Deal Killers Early: Identify financing obstacles before deep due diligence.
• Not Shopping Lenders: Different lenders offer different terms — compare.

Ready to Explore Acquisition Financing?

If you're considering buying a business, start by understanding your financing capacity: