How to Structure a Business Acquisition: Capital Stack, Lender Expectations & Deal Modeling
Buying a business is one of the largest financial decisions an entrepreneur can make. Whether you are acquiring your first company or adding to a portfolio of operating businesses, the way you structure the capital stack structure the deal determines how much cash you need at closing and whether the business produces positive cash flow from day one. This guide covers the main parts of business acquisition financing, what lenders evaluate, and how PeerSense helps buyers manage the process.
Understanding the Capital Stack
The capital stack is the mix of financing sources used to fund a business acquisition. A typical deal includes senior debt usually an SBA 7(a) loan, a seller note, and the buyer’s equity injection. For larger or more complex deals, mezzanine financing or private credit may fill the gap between senior debt and equity.
The goal is to limit the buyer’s out of pocket cash while keeping DSCR at a level lenders accept, typically 1.25x or higher. The calculator above lets you compare SBA loans, seller notes, and mezzanine debt for the structure that fits your deal.
SBA 7(a) Loans: The Foundation of Most Acquisitions
The SBA 7(a) loan program is the financing tool most often used for business acquisitions under $5 million. SBA loans offer 10 year terms with rates tied to the Prime rate, currently Prime + 2.25% to 3.0%. They can finance up to 90% of total project cost, including goodwill, inventory, equipment, and working capital. The SBA guarantee covers 75 to 85% of the loan, reducing lender risk and supporting acquisitions that conventional lending may not support.
SBA acquisition financing generally requires at least 10% equity from the buyer, a DSCR of 1.25x or higher based on trailing cash flow, relevant management experience or a plan to retain key staff, and a purchase price supported by the business's earnings. The SBA guarantee fee ranges from 2% to 3.5% of the loan amount, depending on size, and is typically financed into the loan.
Seller Notes and Standby Requirements
A seller note can help shape the acquisition financing. When the seller finances 10 to 20% of the purchase price, the buyer brings less cash and the structure reflects the seller’s confidence in the business’s future performance. Alongside an SBA loan, the seller note must be on full standby standby for at least 24 months, with no principal or interest payments during that period. After standby, payments typically begin at a negotiated rate, often 5 to 7%, over a 3 to 7 year term.
The seller note needs to fit the rest of the structure. If it is too large, total debt service rises and DSCR can fall below acceptable levels when payments begin. If it is too small, the buyer may need more cash at closing. The calculator above helps you find the balance.
When Mezzanine Financing Makes Sense
Mezzanine financing sits between senior debt and equity in the capital stack. It is typically used when the deal needs more leverage than an SBA loan and seller note can provide, such as when the purchase multiple is above 5x EBITDA or the buyer wants to preserve cash for post close working capital. Mezzanine rates are higher, at 12 to 18%, and terms are shorter, at 3 to 7 years. The added leverage can make otherwise unworkable deals feasible.
For deals above $5 million where SBA financing is unavailable, mezzanine financing can become more important. Combined with conventional senior debt and a seller note, it can provide the leverage needed for larger acquisitions without requiring the buyer to bring 30 to 40% equity.
What Lenders Evaluate in an Acquisition
When underwriting a business acquisition, lenders focus on several factors: trailing cash flow typically 2 to 3 years of tax returns and financial statements, adjusted EBITDA adding back owner compensation above market rate and non recurring expenses, the purchase multiple (price relative to EBITDA), industry risk, and the buyer’s experience. Strong cash flow, a reasonable multiple, and an experienced buyer support better terms from a wider range of lenders.
DSCR is the most important metric in the structure. Lenders want the business to generate at least 1.25x total annual debt service from every source, including the SBA loan, seller note once off standby, and any mezzanine debt. Below 1.25x, the deal needs a lower price, more equity, longer terms, or a different capital source.
How PeerSense Structures Acquisition Deals
PeerSense is a capital advisory firm that sources acquisition capital through a curated network of commercial lenders and capital sources. Talk to PeerSense. The capital source sets the terms on senior debt, the seller note, and any subordinated piece. PeerSense advises on acquisitions of $10 million and up across manufacturing, healthcare, logistics, franchises, and professional services.
Our referral fee is established upfront and paid at closing. Use the calculator above to model your deal, then Talk to PeerSense to walk the structure. The capital source sets the terms.