The Nine Questions Every Buyer Asks Me, and the Answers That Actually Close Deals

If you found the perfect business tomorrow, could you explain, today, exactly where every dollar of the purchase price would come from?

Sit with that one for a second, because in my experience almost nobody can. Every year thousands of capable people set out to buy a small business. They read the books, they build the spreadsheets, they spend months on listings and real money on advisors.

And then a meaningful number of them lose the business they wanted for a reason that has nothing to do with the business at all. They reached the LOI, the clock started, and only then did they discover how much debt a company can actually carry.

By the time they learned those rules, the ones they needed were the ones they had already broken.

Here is the pattern I keep seeing, and it is the whole reason this issue exists.

The buyers who close are not smarter than the buyers who do not. They are not richer, and they did not find better businesses.

They simply asked the right questions earlier, while the answers could still change the outcome.

Since the start of this year I have taken hundreds of calls and emails from current and prospective buyers, first timers leaving corporate jobs, self-funded searchers, operators buying their second and third company.

And yet when I went back through everything, the same nine questions came up over and over, almost word for word. So rather than keep answering them one inbox at a time, I am answering all nine here, the same way I would on a call with you, with the actual SBA rulebook, SOP 50 10 8, open on the desk while I do it.

Question 1: How much cash do I actually need to put down?

This is the first question on nearly every call, and the honest answer is: probably less than you think, but measured against a bigger number than you think.

The SBA requires a minimum equity injection of 10% of total project cost on a complete change of ownership.

Notice: It is not 10% of the purchase price, it is 10% of the whole project, and the project includes the working capital you are borrowing, the SBA guaranty fee, and the closing costs.

Buyers regularly size their savings against the sticker price, get under LOI, and then discover the real denominator is 10% to 15% larger than the number they planned around. That discovery is cheap in month one and very expensive in month four.

Now the part that works in your favor. Up to half of that required injection can come from the seller rather than from you, through a seller note that sits on full standby for the entire life of the SBA loan. So on the right deal, your cash at close can be as low as 5% of the project. And the rulebook is more flexible than most buyers realize about where the rest comes from. Cash that is not borrowed obviously counts, but so does a gift, a grant with no repayment strings, verified prepaid expenses, and even cash from a personal loan, so long as you can show it gets repaid from something other than the business you are buying.

One more wrinkle worth knowing exists, because it surprises people every time. If you already own a business and you are acquiring another one in the same six digit NAICS code, with identical ownership, with the two entities as co-borrowers, SBA treats that as a business expansion and requires no minimum injection at all. That is a narrow doorway and every word of it matters, but for existing owners rolling up their industry it is a meaningful one.

The last piece is the one the rulebook does not mention. Lenders want to see money left over after the injection. Post-closing liquidity is a real underwriting item, so plan on cash beyond the down payment. As a rough planning anchor, your liquid capital tends to support a purchase price somewhere around eight to ten times that figure once the injection and the cushion are both accounted for.

Question 2: Can the seller note count toward my down payment?

Yes, and this single rule shapes more of my deal structuring conversations than any other, so let me walk through it carefully, because the details are where deals quietly die.

There are really two different instruments that both get called a seller note.

The first is seller financing that counts toward your equity injection. For that note to count, the SOP is unambiguous: it must be on full standby for the term of the 7(a) loan, meaning the seller receives no payments of principal and no payments of interest until your SBA loan is fully repaid, and it cannot exceed half of the required injection. The standby gets papered on SBA Form 155 or the lender equivalent, the seller subordinates any lien rights, and the note can accrue interest that gets amortized after the SBA loan is gone. That last detail is a useful talking point with sellers, because standby does not mean the seller earns nothing. It means the seller waits.

The second instrument is an ordinary seller note that does not count as equity. That one can receive payments while the SBA loan is outstanding, and it is still enormously useful. It bridges valuation gaps, it keeps the seller invested in a smooth transition, and it moves debt off the bank's amortizing stack.

Here is the trap, and I see a version of it every month:

A buyer negotiates a note with a two year standby, believes they have covered part of their injection, and finds out in underwriting that they have not, because a note that comes off standby during the life of the loan does not count as equity, full stop.

And there is a second, sneakier version: even a true standby note still shows up in the bank's coverage math, because the lender is required to analyze your total debt load. Standby lowers the cash you need on day one. It does not manufacture cash flow that is not there.

Question 3: The deal is bigger than the $5M SBA cap. Am I out of the game?

Not even close. It just means we are building a stack rather than writing one loan.

The 7(a) program caps at $5M to any one borrower. Above that, the workhorse structure is a 7(a) loan paired with a conventional loan from the same bank, sitting side by side on a pari passu basis. Far more banks will pair a large 7(a) with a conventional piece than will pair a 504 with one, and lately the pricing on the conventional piece has been genuinely competitive. Buyers sometimes come to me convinced the 504 is the answer for a bigger deal, and they are usually surprised to find the rates are not much better and the universe of willing banks is much smaller.

I will go a step further, and this is the counterintuitive advice I find myself giving more and more. Sometimes the right move is to buy bigger, not smaller.

A business large enough to have a real management team underneath the owner is often a safer first acquisition than a small one where every decision routes through you from day one.

The bigger deal has a bigger price tag, but it can carry more debt safely, and it does not collapse if you catch the flu in month two. If your capital and your risk appetite genuinely allow it, do not let the $5M number define your search. It is a program parameter, not a law of nature.

Question 4: How do lenders decide whether my deal cash flows?

Everything in SBA lending eventually funnels down to one ratio, and it is worth understanding exactly how it is built, because this is the gate your deal either clears or does not.

The lender calculates the business's operating cash flow, defined in the SOP as EBITDA, adjusts it for things like non-recurring income, unfunded capital expenditures, and owner's draw, and divides it by the total debt service, meaning the principal and interest on every dollar of business debt including the new SBA loan.

The SBA floor for that ratio is 1.15x on a historical or projected basis, with global coverage, meaning your whole personal financial picture, of at least 1:1.

In practice most banks underwrite to their own higher bar, typically 1.25x or better, because they want cushion. So when I screen a deal, I test it at the bank's bar, not the SBA's.

Two things inside that math catch buyers constantly. First, the market salary problem. Buyers love to model themselves working for free, and underwriters simply will not accept it. A market rate salary for you goes into the expense line before coverage is measured, and if the deal only works when you earn nothing, the deal does not work. Second, the projections problem.

If the most recent full year and the interim statements do not show sufficient coverage on their own, the rulebook requires the lender to obtain two years of detailed projections with supporting assumptions, and to justify why projections deserve more weight than history. That is a much heavier lift. A deal that pencils on last year's tax return is in a different league than a deal that pencils on your optimism.

When coverage comes in thin, the instinct is to argue about price, and price is usually the wrong lever. The right levers are structural: move debt off the bank's amortizing stack and onto seller paper, put the seller note on standby or give it an interest only runway, or bring more equity. Two deals at the identical price can finance completely differently depending on nothing more than how the debt is split between the bank and the seller.

Question 5: The business has one big customer. Is that a dealbreaker?

Customer concentration is the page in the data room a credit officer will find in about ninety seconds, and I will not pretend it is a small thing. Concentration north of roughly 20% to 30% of revenue will make some banks pass without a second meeting. But here is the reframe that matters: concentration is a structuring problem before it is a declining problem, and the same deal can be a decline at one bank and a term sheet at another whose credit box rewards the story.

Think about what the bank is actually afraid of.

It is not the customer's existence, it is the customer's departure the month after the seller, who owns that relationship, walks out the door.

So the structures that work all do the same job, they keep the seller economically tied to the relationship surviving. A meaningful seller note does it, because the seller does not get paid if the business craters. A longer, well defined transition period does it. Contract terms, tenure of the relationship, and switching costs all help tell the story. What does not work is hoping the bank will not notice, because the bank will notice before you finish your coffee.

And sometimes the honest answer is that the concentration is fatal for SBA financing at the price being asked, and the kindest thing I can do is say so before you spend a dollar on diligence. I would far rather tell a buyer an uncomfortable truth in week one than watch them discover it in week nine.

Question 6: Do I have to personally guarantee the loan? Does my spouse?

You, yes, always. Anyone who owns 20% or more of the business signs a full personal guaranty, and there is no structuring around it. I tell every buyer to make peace with this early, because the guaranty is the price of admission to a program that lets you buy a business with 10% down. If the guaranty is genuinely intolerable, SBA leverage is the wrong tool.

The spouse question is more nuanced, and the rulebook is more specific than most people expect. If you and your spouse each own less than 20% but together you cross 20%, both of you sign full guaranties, and ownership of spouses and minor children gets combined for that test.

If your spouse owns nothing, they are not automatically a guarantor, but the lender must still require their signature on the collateral documents for jointly held assets, and a spousal guaranty secured by jointly held collateral is limited to their interest in that collateral.

Beyond the requirements, lenders sometimes ask a non-owner spouse to sign as a supplemental guarantor by choice, and there is a genuine tradeoff in saying yes. Adding a working spouse's income to the global cash flow analysis can strengthen the file and even let you take a smaller salary from the business in the early years. It also puts them on the hook.

That is a family decision as much as a financing decision, and I always tell buyers to treat it as one, deliberately, rather than as one more signature page in a stack of forty.

Question 7: My money is tied up in a 401(k) or company stock. Can I still buy?

Usually yes, and often without selling a single share. This question has come up more this year than ever, and I think I know why. There is a generation of operators and tech employees sitting on retirement accounts and appreciated stock who have concluded that buying a business beats watching a brokerage statement. Their net worth is real. It is just not liquid, and lenders fund with cash.

Two roads get you there. Retirement money can be deployed through a ROBS structure, a rollover for business startups, which lets 401(k) funds purchase equity in the acquiring company without the withdrawal taxes and penalties. It works, I see it done regularly, and it is genuinely technical, with its own compliance obligations that continue after closing, so it belongs with a provider who does it every day, not a do-it-yourself weekend project.

For concentrated stock positions, my standing advice is do not sell the stock, borrow against it. A securities backed line of credit can fund your injection while the position keeps compounding, and you skip realizing the gains in the year you also happen to be buying a company.

One caution from the SOP worth knowing: cash from a personal loan only counts as injection if you can show it gets repaid from a source other than the business you are buying, so the paperwork on where the money comes from and how it gets serviced matters.

Both roads have tax and legal dimensions that are outside my lane. Before you commit to either one, get your CPA and an attorney into the conversation. My lane is making sure the structure works for the lender, and both of these can.

Question 8: What actually kills deals between LOI and closing?

Almost never the headline numbers. The deals I watch die between LOI and closing die of things that were knowable, and fixable, months earlier. Four of them account for most of the funerals.

The first is the seller's cash at close. Nobody pinned down what the seller actually needs to walk away with, everyone negotiated the price, and then the seller finally did the math on the note and the standby and the deal came apart in renegotiation. Ask the awkward question early: what does the seller need in their pocket on closing day, and does the structure deliver it?

The second is working capital. Is it included in the price, is it on a formula, is it being borrowed as part of the project?

Every party assumes a different answer, and the SOP actually requires the lender to analyze working capital adequacy over the next twelve months, so the bank will force the question eventually. Better that you force it first.

The third is licensing. In businesses where a license holder must qualify the company, and the seller is that person, the buyer can inherit a business that is not legally allowed to operate the day after closing. If the license cannot transfer cleanly by closing day, that is not a detail, that is the deal.

The fourth one buyers inflict on themselves: shopping the deal to nine or ten banks directly before getting advice. Every bank that sees and passes on your deal is a bank the deal cannot go back to, and I have watched buyers burn through the entire realistic lender universe before the process properly started.

Banks also talk to each other more than you think. Be strategic about who sees the deal, in what order, and with what story attached. A deal gets one first impression per bank, and you only have so many banks.

Question 9: What should I have ready before I go under LOI?

Every buyer who moved fast this year did the same unglamorous homework before they found their deal, and every buyer who scrambled skipped some of it. The list is not long.

They had a financial letter of support in hand, so their offers carried weight with brokers who see a dozen unfunded LOIs a month.

They had the document package ready, a personal financial statement, three years of personal tax returns, a resume, and an honest read on their own credit, because a surprise on a credit report is a solvable problem in January and a crisis in June. They knew their liquidity ceiling and searched inside it, instead of falling in love with a business two sizes too big. And they had their team identified before the clock started, an attorney who does lower middle market M&A and a quality of earnings provider, so the 60 to 90 days after LOI got spent executing instead of interviewing.

On timing, work backward. A well run SBA acquisition takes roughly 10 to 11 weeks from signed LOI to close, and the buyers who hit that schedule are the ones who started the financing conversation before they signed.

The single highest-leverage move available to any buyer reading this is embarrassingly simple: talk to your financing partner before you need the financing.

Thanks for reading!

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Until next time,

Matthias Smith

President, Pioneer Capital Advisory

​www.pioneercapitaladvisory.com​
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Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

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