Financing a Business Acquisition: The Capital Stack, Plainly
Buying a business is rarely one loan. It is usually three or four sources layered together. What each layer does, who provides it, and how to keep a deal alive when the senior lender is slow.
Most small business acquisitions are financed in layers, and the buyer's job is to assemble them so that the total covers the price and the payments fit the cash flow of the business being bought. The layers have names, and knowing them makes the conversation with every lender shorter.
Equity: what the buyer puts in
Every lender wants the buyer to have money at risk. Ten to twenty percent of the price is typical, more for a first-time buyer or a thin-margin business. This layer comes first and does not get borrowed, at least not visibly.
Senior debt: the main loan
The largest layer is usually a senior term loan secured by the business's assets, often an SBA 7(a) for deals under $5 million. It can cover 50 to 80 percent of the price, on a ten-year term for a business without real estate. This is also the slowest layer: eight to twelve weeks from a complete file for an SBA loan, and the reason deals die waiting.
Seller financing: the seller as lender
Many sellers carry a note for ten to thirty percent of the price, paid over three to seven years, sometimes with payments deferred for the first year. Senior lenders like seller notes because the seller keeps an interest in the business succeeding. Negotiating the seller note is often the buyer's biggest lever.
Mezzanine or bridge: the gap layer
When equity, senior debt and the seller note do not reach the price, or when the senior loan is not ready by closing, a private lender fills the gap. A bridge loan funds the close now and is refinanced by the senior loan when it lands. A mezzanine loan sits behind the senior lender for the full term at a higher rate. Both are expensive relative to bank debt and cheap relative to losing the deal.
Working capital: the layer buyers forget
The purchase price is not the whole cost. The business needs cash on day one for payroll, inventory and the receivables that have not collected yet. A line of credit arranged before closing, secured by the business's receivables or inventory, is how a buyer avoids being cash-poor in the first ninety days.
Keeping the deal alive
The most common failure is a signed purchase agreement with a closing date the senior lender cannot meet. The answer is to line up the bridge early, not as a rescue at the end, so the seller sees a buyer who can close on the date regardless. A bridge that is never drawn costs a commitment fee; a deal that dies waiting for a bank costs the deal.
Bring the purchase agreement, the seller's last three years of financials, your own financial statement and a one-page plan for the first year. From that, the layers can be sized in a day, and the conversation with each lender starts from a stack that already adds up.
Applications reach the desk directly.