How to Structure a Business Acquisition: Capital Stack, Lender Expectations & Deal Modeling
Buying a business is one of the most significant financial decisions an entrepreneur can make. Whether you’re acquiring your first company or adding to a portfolio of operating businesses, the way you structure the capital stack determines everything — from how much cash you need at closing to whether the deal generates positive cash flow from day one. This guide walks through the key components of business acquisition financing, what lenders evaluate, and how PeerSense helps buyers navigate the process.
Understanding the Capital Stack
The capital stack is the combination of financing sources used to fund a business acquisition. In a typical deal, the stack 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 minimize the buyer’s out-of-pocket cash while maintaining a debt service coverage ratio (DSCR) that lenders find acceptable — typically 1.25x or higher. The calculator above lets you model different combinations of SBA loans, seller notes, and mezzanine debt to find the structure that works for your specific deal.
SBA 7(a) Loans: The Foundation of Most Acquisitions
The SBA 7(a) loan program is the most widely used financing tool 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%), and they can finance up to 90% of the total project cost — including goodwill, inventory, equipment, and working capital. The SBA guarantee (75–85% of the loan) reduces lender risk, which is why banks are willing to finance acquisitions that they wouldn’t touch with conventional lending.
The key requirements for SBA acquisition financing include a minimum 10% equity injection from the buyer, a DSCR of 1.25x or higher based on historical cash flow, relevant management experience (or a plan to retain key staff), and a purchase price that’s supportable 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 is a powerful tool in acquisition financing. When the seller agrees to finance 10–20% of the purchase price, it reduces the buyer’s cash requirement and signals the seller’s confidence in the business’s future performance. However, when used alongside an SBA loan, the seller note must be on full standby for at least 24 months — meaning no principal or interest payments during that period. After the standby period, payments typically begin at a negotiated rate (often 5–7%) over a 3–7 year term.
Structuring the seller note correctly is critical. If the note is too large, it increases total debt service and can push the DSCR below acceptable levels once payments begin. If it’s too small, the buyer may need more cash at closing. The calculator above helps you find the right balance.
When Mezzanine Financing Makes Sense
Mezzanine financing sits between senior debt and equity in the capital stack. It’s typically used when the deal requires more leverage than an SBA loan and seller note can provide — for example, when the purchase multiple is above 5x EBITDA, or when the buyer wants to preserve cash for post-close working capital. Mezzanine rates are higher (12–18%) and terms are shorter (3–7 years), but the additional leverage can make deals feasible that wouldn’t work otherwise.
For deals above $5 million where SBA isn’t available, mezzanine financing becomes even more important. Combined with conventional senior debt and a seller note, it can provide the leverage needed to close larger acquisitions without requiring the buyer to bring 30–40% equity to the table.
What Lenders Evaluate in an Acquisition
Lenders underwriting a business acquisition focus on several key factors: historical cash flow (typically 2–3 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. A deal with strong cash flow, a reasonable multiple, and an experienced buyer will attract the best terms from the widest range of lenders.
The DSCR is the single most important metric. Lenders want to see that the business generates at least 1.25x the total annual debt service from all sources — SBA loan, seller note (once off standby), and any mezzanine debt. If the DSCR is below 1.25x, the deal either needs restructuring (lower price, more equity, longer terms) or a different capital source.
How PeerSense Structures Acquisition Deals
PeerSense is a commercial lending firm that specializes in business acquisition financing. We don’t lend money — we match buyers with the right combination of SBA lenders, seller note structures, and subordinated debt providers to build a capital stack that works. Our advisors have structured hundreds of acquisitions ranging from $500K to $25M+, across industries including manufacturing, healthcare, logistics, franchises, and professional services.
There are no upfront fees. We get paid by the lender at closing. Use the calculator above to model your deal, then book a free acquisition strategy call to discuss your specific situation. We’ll tell you exactly how to structure the deal, what lenders will require, and how to maximize your chances of approval.