Few buyers pay for a business entirely from their own savings. Most deals combine several sources of money, each with its own cost, rules and claim on the business's cash. How you put those layers together decides how much you can offer, how much risk you carry personally and whether the business can meet its repayments in a bad year. This guide covers the main layers, outlines government-backed lending in the countries Loupe covers and shows how lenders test affordability. It is general information, not financial advice. Before you commit, take advice from an accountant, a lawyer and, where useful, a finance broker who works on acquisitions.
A business broker markets businesses for sale and manages the process on the seller's behalf. The broker is usually paid by the seller, mostly when a deal completes.
How a deal is usually funded
Start with sources and uses. The uses are everything the deal costs: the purchase price, legal, accounting and lender fees, any transfer taxes, and the working capital the business needs from its first day under your ownership. The sources are where the money comes from. Buyers often forget working capital and find themselves short of cash within weeks. The working capital and inventory guide explains why.
A typical small deal draws on some mix of:
- your own money, called a deposit, a down payment or an equity injection
- a senior loan from a bank or specialist lender
- seller finance, where the seller receives part of the price later
- an earn-out, where part of the price depends on future performance
- outside equity from investors, the route many search funders and independent sponsors take, or occasionally a loan that ranks behind the bank
The layers rank in order. Senior lenders are repaid first, then subordinated lenders such as the seller, then equity holders. The further down the order, the greater the risk and the higher the return that provider expects.
Working capital is the money tied up in running a business day to day, mainly stock and money owed by customers, less money owed to suppliers. A sale needs to agree how much of it comes with the business.
Seller finance is when the seller lends the buyer part of the purchase price, to be repaid with interest after completion. It is also called vendor finance or a seller note.
An earn-out is part of the purchase price paid only if the business meets agreed targets after the sale. It can bridge a gap between the seller's price and the buyer's view of the evidence.
Your deposit
Lenders want you to have your own money at risk. It shows commitment and gives them a cushion if the business turns out to be worth less than you paid. How much they ask for depends on the lender, the business, your experience and how much of the price is backed by physical assets rather than goodwill.
Where the money comes from matters as much as the amount. Lenders will check its source, and some schemes limit what counts. Borrowing your deposit against your home adds personal debt that the business's accounts do not show. If investors provide part of the equity, agree in writing what they receive, what say they have in decisions and when they expect a return.
Goodwill is the part of a purchase price above the value of a business's identifiable assets, less its liabilities. It reflects things like reputation, customer relationships and trained staff.
Senior lenders
A bank or specialist lender offering senior debt will usually look at:
- Historical cash flow, normally from accountant-prepared accounts and tax returns rather than your projections.
- Debt service coverage, explained with an example below.
- Security, such as charges over business assets, and often a personal guarantee from you. Goodwill makes poor security, which is one reason businesses with few physical assets can be harder to finance.
- Your experience in the industry or in running a business of similar size.
- The quality of the numbers. Undocumented add-backs rarely survive a lender's review. See add-backs: which hold up and which do not.
- Covenants, ongoing tests such as a minimum coverage ratio, which can put you in default even when every payment has been made.
Ask whether the rate is fixed or variable, and about the repayment period, fees, early repayment charges, covenants and any security or guarantees required. Read a personal guarantee carefully and take legal advice on it, because it can put your home and savings at risk.
Senior debt is borrowing that ranks first for repayment and is usually secured on the business's assets. It is typically the cheapest part of acquisition finance and carries the strictest conditions.
Debt service coverage compares the cash a business generates with the loan repayments it must make. Lenders use it to judge whether an acquisition can carry its debt.
Add-backs are costs added back to reported profit to show what a business would earn under a new owner. They raise SDE and adjusted EBITDA, so each one needs evidence.
Government-backed loan schemes
Several governments support lending to small businesses, usually by guaranteeing part of a lender's losses and sometimes by lending directly. A guarantee protects the lender, not you: you remain liable for the whole debt. Schemes and their rules change often, so treat this section as a starting point and confirm the current position with a lender.
United States
The SBA 7(a) loan programme is widely used for smaller acquisitions. Approved lenders make the loans and the Small Business Administration guarantees part of each one. The maximum 7(a) loan is $5 million, and a complete or partial change of ownership is an eligible use.
The SBA's operating procedure for lenders sets the detailed rules. Under the version that applies to applications from 1 October 2026, a purchase that makes you the majority or largest owner of a business you have never owned or worked in is an initial acquisition, and these points apply:
- Equity. You need an equity injection of at least 10% of total project costs, which cover more than the price, and the lender cannot reduce it.
- Seller debt. A seller note counts towards the injection only if it is on full standby, meaning no payments of principal or interest for the life of the SBA loan. Standby debt and a few other limited sources can make up no more than half of the required injection.
- Coverage. Debt service coverage must be at least 1.25 times, measured on the last financial year or the average of the last two, with only adjustments the lender can justify, not on your projections.
- Term. The part of the loan that funds the purchase, other than any real estate, is repaid over no more than ten years.
- Quality of earnings. Where the business purchase price, excluding owner-occupied real estate, is $3 million or more, the lender must obtain an independent quality of earnings report.
- The seller's role. Seller earn-outs are not allowed, although a performance-based rebate from the seller to the buyer is, and it must go towards paying down the loan. The seller cannot stay on as an owner, officer or employee, but the business can hire them as a consultant for up to 24 months.
United Kingdom
The British Business Bank's Growth Guarantee Scheme works through accredited lenders offering term loans, overdrafts, asset finance, invoice finance and asset-based lending. The lender receives a 70% government-backed guarantee on the balance still outstanding after its normal recovery process, while you remain liable for all of it. Facilities can generally reach £2 million per business group, with lower limits for businesses covered by the Northern Ireland Protocol. The finance can be used for any legitimate business purpose, but each lender makes its own credit decisions, including whether to use the scheme for an acquisition and on what terms.
Europe
There is no single European scheme. Many countries have a national promotional bank that supports business transfers, usually through your own bank. In Germany, KfW offers a start-up and succession loan that covers taking over a business and is applied for through a bank. In France, Bpifrance offers a transmission loan for acquiring a business or a controlling stake. Eligibility and terms differ from country to country, so ask a local bank which programmes apply to you.
Canada
The Canada Small Business Financing Program shares the risk of loans made by participating lenders to businesses with gross annual revenues of C$10 million or less. It can finance the purchase of the assets of an existing business, but not the purchase of shares. The maximum is C$1.15 million: up to C$1 million in term loans and up to C$150,000 in lines of credit. Within the term loans, no more than C$500,000 can be used for purposes other than real property, and of that, no more than C$150,000 for intangible assets and working capital. Goodwill bought as part of a going concern counts as an intangible asset, so it falls within that smaller limit, and a purchase that is mostly goodwill may need other finance alongside. BDC, a Crown corporation whose sole shareholder is the Government of Canada, also offers business purchase loans with extra financing for goodwill, client lists and intellectual property.
Australia
The federal SME loan guarantee schemes that began in March 2020 closed to new loans on 30 June 2022. Acquisitions are financed on commercial terms by banks and other lenders, each with its own requirements for deposits and security. State and territory support changes over time, so check what is available when you are ready to borrow.
South Africa
Sedfa, the Small Enterprise Development and Finance Agency, was formed on 1 October 2024 by merging sefa, Seda and the development agency for co-operative banks. It lends to small businesses and runs a credit guarantee scheme, which covers banks and other lenders when a small business lacks the collateral they would normally require. Commercial banks also lend for acquisitions on their own terms. Confirm with the lender whether a guarantee product can support the purchase of an existing business before you rely on it.
An SBA 7(a) loan is a US business loan made by an approved lender and partly guaranteed by the US Small Business Administration. It applies only in the United States and is widely used to buy small businesses.
A quality of earnings review is an accountant's analysis of whether a business's reported earnings are accurate, sustainable and correctly adjusted. It is not an audit.
Seller finance
Seller finance, also called vendor finance or a seller note, means the seller accepts part of the price later, usually with interest, rather than all of it at completion. In the UK it is often documented as deferred consideration or a loan note. It narrows the gap between what you can borrow and what the seller wants, and it keeps the seller interested in the business doing well after the sale. A seller who refuses any deferred payment is telling you something about their confidence. See refusal of any seller finance or earn-out.
Points to agree include:
- the amount, interest rate, repayment schedule and term
- whether the note ranks behind the bank, and whether the lender requires it to be on standby, as SBA rules can
- what happens if a payment is missed, and what security, if any, the seller holds
- any right to reduce or set off payments if a warranty proves untrue or a key customer leaves soon after completion
- whether the balance becomes payable at once if you sell the business or refinance
The bank's terms usually shape the seller's. Agree seller finance in principle early, then confirm the detail once you know what your lender will accept.
Earn-outs
An earn-out makes part of the price depend on how the business performs after completion. It helps when buyer and seller disagree about the future: a recent growth spurt, a large contract awaiting renewal or a new product line that has yet to prove itself.
A workable earn-out defines:
- The measure. Revenue is easy to check but ignores margin. Gross profit is a fair middle ground. EBITDA is closest to value but easiest to dispute, because it depends on costs you now control.
- The period. Long enough to show whether the claimed performance holds, short enough to keep the seller engaged.
- The calculation. Accounting policies, treatment of one-off items and who prepares the figures.
- Limits. The most the seller can earn and whether any part is guaranteed.
- Conduct. What you may change during the period, such as pricing, staffing or merging the business with another.
- Disputes. How disagreements are settled, for example by an independent accountant.
Earn-outs shift risk to the seller but create room for conflict. Lenders may restrict earn-out payments while their loan is outstanding, and some government-backed lending rules exclude them: SBA 7(a) acquisition loans do not allow seller earn-outs at all. The tax treatment of deferred and contingent payments varies by country and deal structure, so take tax advice before you agree one.
EBITDA is earnings before interest, tax, depreciation and amortisation. It helps compare operating profit across businesses, but it is not the same as cash.
Debt service coverage, with a fictional example
Debt service coverage compares the cash a business generates with the loan payments it must make. Divide the earnings available to service debt by the total annual payments of principal and interest. A ratio of 1.0 means every dollar of earnings goes to lenders, leaving nothing for a slow month, new equipment or your own return. Lenders set their minimum above 1.0, and each calculates earnings in its own way, often after tax, capital spending and a salary for whoever runs the business. Ask your lender how it does the sum.
Larkspan Office Cleaning is a fictional US commercial cleaning company with SDE of $500,000. The buyer plans to hire a general manager at a market salary of $100,000, so the earnings available to service debt are $400,000.
The agreed price is $1,600,000, funded as follows:
| Source | Amount | Share | Terms |
|---|---|---|---|
| Buyer's deposit | $160,000 | 10% | none |
| Seller note | $240,000 | 15% | five years at 8% |
| Bank loan | $1,200,000 | 75% | ten years at 9% |
To keep the sums simple, the example leaves out fees and working capital, which a lender would add to total project costs.
With monthly repayments, the bank loan costs about $182,000 a year and the seller note about $58,000, a total of about $241,000.
Debt service coverage is $400,000 divided by $241,000, or about 1.66 times.
Now test it. If earnings fell by a quarter to $300,000, perhaps because a large contract was lost, coverage would fall to just under 1.25 times, below the minimum the SBA sets for an initial acquisition. If the seller note were instead on full standby, with no payments while the bank loan is outstanding, coverage on the original $400,000 would be about 2.2 times, though the seller would wait much longer to be paid.
In buyer mode, the affordability check in Loupe's valuation tool runs a similar calculation for any business you value. You set the deposit percentage, seller finance share, interest rate and loan term, and it shows the loan amount, annual debt service, debt service coverage against a threshold that defaults to 1.25 times, and simple payback in years. Like every result from the tool, it is indicative, not financial advice.
Seller's discretionary earnings (SDE)
Seller's discretionary earnings is the yearly financial benefit a business gives one full-time working owner, before financing costs, non-cash charges and one-off spending.
Putting the structure together
A few principles hold wherever you buy:
- Borrow against earnings you have verified, not the listed figures or your growth plans.
- Leave headroom. A structure that works only if nothing goes wrong will be tested in the first year.
- Keep cash in the business. Fund working capital and a reserve, not just the price.
- Line up finance early. Speak to lenders before you agree a price in a letter of intent (heads of terms in the UK), so that your offer reflects what you can actually fund. The guide from first call to letter of intent covers that stage.
- Add up your personal exposure. Total every guarantee, charge over your home and personal loan before you sign.
Financing follows diligence. The more of the seller's claims you can verify, from earnings to customer concentration, the stronger your case with a lender and the less likely you are to borrow against figures that do not hold.
A letter of intent sets out the main terms on which a buyer proposes to acquire a business, before due diligence and the full purchase agreement. In the UK the equivalent is usually heads of terms.
Heads of terms is the UK name for a short document recording the main commercial terms of a deal before the legal documents are drafted. It is the equivalent of a US letter of intent.
Due diligence is the investigation a buyer carries out before committing to a purchase, testing the finances, contracts, legal position and operations against what the seller has described.