How to buy a business with an SBA loan

How much business can you afford with an SBA loan?

Two things set your budget: the cash you can invest and the cash flow of the business you buy.

• Your cash. For an initial acquisition, the SBA requires an equity injection of at least 10% of the total project cost. That cost usually includes the purchase price, working capital, closing costs and the SBA guaranty fee. Many lenders also want to see some savings left after closing.
• The business’s cash flow. Lenders size the loan so the business can cover all of its debt payments with room to spare. For an initial acquisition, the SBA requires debt service coverage of at least 1.25x.

Definition

Debt service coverage ratio (DSCR): The business’s cash flow available to pay debt, divided by its total annual debt payments. A ratio above 1 means the business earns more than it needs to make those payments.

The term matters too. The business portion of an acquisition loan is repaid over up to 10 years, so payments are higher than on a long real estate loan. Real estate in the deal can stretch to 25 years.

Use the borrowing estimator for a rough loan size, then test specific deals in the SBA loan calculator.

How do you find a business to buy?

Most buyers find deals through a few channels:

• Business brokers and online marketplaces, which usually share a detailed information package after you sign a nondisclosure agreement.
• Your industry network, including suppliers, accountants and attorneys who know owners planning to retire.
• Direct outreach to owners of businesses you’d like to run.
• Your current employer, if the owner is planning an exit.

Screen deals before you spend money on them. Ask for several years of tax returns and financial statements, and focus on businesses whose cash flow can carry the debt at the asking price. Lenders weigh your experience heavily, so a business close to what you’ve managed before is usually easier to finance. If it’s a franchise resale, see SBA franchise loans for the extra requirements.

What should a letter of intent include?

A letter of intent (LOI) sets out the main deal terms before you pay for lawyers and reports. Most LOIs are nonbinding on price and terms but binding on confidentiality and exclusivity. A strong LOI covers:

1. The price and structure, including whether you’re buying the company’s assets or its stock
2. What’s included: equipment, inventory, working capital, and the real estate or lease
3. Any seller note, including whether it will be on full standby
4. The seller’s transition role and how long it lasts
5. A due diligence period and exclusivity
6. Contingencies for financing, due diligence and a supportive valuation

When should you talk to an SBA lender?

Early: as soon as you have a serious target, and no later than signing the LOI. An acquisition lender can review the seller’s financials and your background and tell you whether the price and cash flow are likely to support a loan, how much equity it wants and which third-party reports it will need. Many lenders issue a term sheet at this stage.

Lenders differ widely on acquisitions. Some finance many goodwill-heavy purchases each year in your industry; others rarely do. Preferred lenders can approve SBA loans themselves, while others send the loan to the SBA, which takes about 5–10 business days. See how long an SBA loan takes and the SBA loan documents checklist.

How do you do due diligence on a business’s financials?

Due diligence confirms that the business earns what the seller says and that those earnings will continue under you. Many buyers hire a CPA with acquisition experience and an attorney to help.

What to review	What you’re checking
Business tax returns and financial statements, plus year-to-date figures	That reported earnings match what was filed, and which way the trend is heading
Bank statements	That deposits support the reported revenue
The seller’s add-backs	That each adjustment is documented and won’t recur once you own the business
Customer and supplier lists	Whether a few customers or suppliers account for too much of the business
Leases and key contracts	Whether they can transfer to you and how long they run
Payroll and key employees	Who the business depends on and whether they’re likely to stay

Add-backs deserve the closest look. Sellers often add personal expenses, one-time costs and their own salary back to earnings. Each one raises the price you pay, and your lender will test the same numbers.

How is the business valued?

Under SOP 50 10 8.1, which took effect October 1, 2026, purchases above $350,000 need an independent business valuation from a credentialed appraiser. Below that, the lender may value the business itself if the buyer and seller aren’t closely related. The lender usually orders the valuation, and buyers typically pay for it.

If the valuation comes in below the agreed price, expect to renegotiate, cover the gap with more of your own cash, or walk away. Lenders generally won’t lend against value the appraiser doesn’t support.

When do you need a Quality of Earnings report?

For purchase prices of $3 million or more, the SBA requires a Quality of Earnings (QoE) report. An accounting firm tests whether the seller’s earnings are accurate and repeatable, adjusting for one-time items and owner expenses. These reports take time, so order one as soon as you know the deal needs it. Some lenders ask for one on smaller deals too.

How do the equity injection and seller note work?

For an initial acquisition, your equity injection is at least 10% of the project cost, and it can’t be reduced. Lenders verify where the money comes from, usually with bank statements, so avoid large unexplained transfers during the deal.

Seller financing can help. A seller note on full standby can cover up to half of the required injection. Full standby means the seller gets no principal or interest payments for the life of the SBA loan; the rest of the injection must be your own cash. A seller note that’s paid during the loan is allowed, but it doesn’t count as equity, and the lender includes its payments when it checks cash flow.

Negotiate the seller note’s terms in the LOI, and expect the lender to require the seller to sign a standby agreement at closing. For the full rules, see buying a business with an SBA loan and our guide to SBA loan down payments.

What happens at closing?

Closing comes after loan approval, once the lender has everything on its closing checklist. Expect:

• The final purchase agreement, bill of sale or stock transfer documents, plus the seller note and standby agreement
• SBA loan documents, including personal guarantees from owners of 20% or more
• A lease assignment or new lease, landlord consents, and the transfer of licenses and permits
• Proof of the insurance the lender requires, which can include life insurance on key owners
• Lien searches and payoff of any debt secured by the business’s assets

At closing, your equity injection goes in, the lender funds the purchase and ownership transfers to you.

How does the seller transition work?

The transition period is when you learn the business while the seller is still available. A good plan covers training on operations, introductions to key customers, suppliers and employees, and handing over accounts, logins and processes.

Put the plan in the purchase agreement. When you buy the whole business, the SBA limits how long and in what role the seller can stay, so agree on the transition terms with your lender before you sign. Buyers also commonly ask the seller to sign a non-compete agreement. Meet key employees early, with the seller’s agreement, and talk with them about their roles so the change of ownership doesn’t come as a surprise.

How do you find the right lender for a business acquisition?

Acquisition lending is a specialty. Lenders differ in the industries, deal sizes and states they finance, and in how comfortable they are with goodwill. Starting with lenders that regularly fund purchases like yours usually means fewer surprises in underwriting.

SBA Loan Connect ranks lenders using the SBA’s public 7(a) and 504 loan records, so you can see which lenders actually fund acquisitions like yours. Partner lenders are labeled. It’s free, and there’s no credit check. See how we rank lenders or get matched with lenders.