Buying a business that already has customers, staff and a track record can be a faster path to ownership than starting from zero. It also means bigger numbers, more paperwork and a lender who wants to see that the business can carry its new debt. Here is how financing a business acquisition generally works, the main options to consider and what to prepare before you make an offer.
Flex Fuel does not promise funding or approvals. This article is general education, not financial, legal or tax advice. Lender requirements and terms vary.
Why buying a business is different from starting one
The U.S. Small Business Administration notes that buying an existing business can come with an existing blueprint: an established customer base, defined operating expenses and trained employees. You also typically get complete control over its direction, but without the outside guidance a franchise system provides.
For a lender, that history means real financial statements and tax returns to review, not just projections.
Common ways to finance a business purchase
Many acquisitions combine more than one source of money.
SBA 7(a) loans
The SBA describes the 7(a) loan program as its primary business loan program. The SBA does not lend the money itself; it provides a guarantee to participating lenders. Eligible uses listed by the SBA include changes of ownership (complete or partial), working capital, real estate, equipment and refinancing certain business debt, and the maximum 7(a) loan amount is $5 million.
The SBA also lists eligibility basics: the business must be an operating, for-profit business located in the U.S., be small under SBA size standards, not be an ineligible business type, be unable to get the desired credit on reasonable terms from non-government sources, and be creditworthy with a reasonable ability to repay. Most 7(a) term loans are repaid with monthly payments from the cash flow of the business. For a broader look at the process, see our guide on how to prepare for an SBA loan.
Conventional bank or credit union loans
Some banks and credit unions finance acquisitions without an SBA guarantee, usually for buyers with strong credit, industry experience and a meaningful amount of their own money in the deal. Terms and collateral requirements vary widely, so compare offers. Many business loans also come with a lien on business assets; our post on UCC filings and blanket liens explains what that means.
Seller financing
In some deals the current owner agrees to be paid part of the price over time, under a written promissory note. That can reduce how much you need to borrow elsewhere. Terms are negotiated, so have an attorney review any seller note.
Your own cash and investors
Lenders typically want to see that the buyer has something at stake. The SBA points out that self-funding lets you keep control but means you take on all the risk yourself, and it warns to be especially careful about tapping retirement accounts early because of possible fees, penalties and harm to your retirement. Partners or investors can add capital, but usually share ownership and control.
How lenders look at an acquisition
Expect a lender to evaluate both the business and you.
The business's cash flow
The core question is whether the business's cash flow can cover its existing costs plus the new loan payment. Our guide to the debt service coverage ratio shows how lenders run that math, and our post on business bank statements explains what they look for in deposits and balances.
The price you are paying
The SBA lists several common methods for valuing a business, including:
- Capitalized earnings: based on the return an investor expects.
- Excess earnings: similar, but separates return on assets from other earnings.
- Cash flow: often used to determine how much of a loan the business's cash flow can support.
- Tangible assets (balance sheet): values the business by its tangible assets.
- Specific intangible assets: compares buying a wanted intangible asset with creating it.
If the price is far above what the cash flow supports, a lender may lend less than you hoped, and you would have to cover the gap or renegotiate.
You, the buyer
For many small business loans, the owner's personal credit matters. The SBA notes that loan eligibility for a new business is typically based on its owner's personal credit score. Lenders often ask for a personal guarantee as well, so review your credit reports early. Flex Fuel clients use SmartCredit to see their credit reports and scores in one place and monitor changes while they prepare.
Sizing up a business to buy? Book a time to talk through your credit, documents and acquisition plan with us.
Your due diligence checklist
The SBA recommends a thorough, objective investigation and suggests hiring an attorney and an accountant. It lists documents they can help you create and evaluate, including:
- Letter of intent
- Confidentiality agreement
- Contracts and leases
- Financial statements
- Tax returns
- Sales agreement
- Purchase price adjustment
The SBA also suggests confirming licenses and permits (transferring them or applying for your own), checking zoning requirements, and reviewing environmental regulations if real property is part of the deal. Ask about contracts, leases, existing cash flow and inventory.
If you are considering a franchise instead, the SBA notes that franchise brands must be listed in the SBA Franchise Directory to obtain SBA financing, and that placement in the directory is not an endorsement and does not ensure success.
Step by step: from search to closing
- Get your own finances in order. Review your credit, know how much cash you can put in and keep your personal and business money separate. See how to separate business and personal finances.
- Shortlist businesses that fit your budget, skills and lifestyle.
- Request financials under a confidentiality agreement and run the numbers.
- Talk to lenders early. The SBA's Lender Match tool connects you with lenders that offer SBA-guaranteed loans.
- Make an offer through a letter of intent, with your attorney involved.
- Complete due diligence and finalize financing.
- Close and plan the transition.
A solid written plan helps at every step. Our guide on writing a business plan for a loan covers what lenders expect to see.
How Flex Fuel helps
Flex Fuel works with business owners nationwide (we are based in Atlanta) to get funding-ready: reviewing personal and business credit, organizing documents and building a clear plan before you sit down with a lender. We do not make lending decisions or broker loans. Explore our services and see how our guarantee works.
Looking at a business to buy? Book a complimentary strategy session. We will review your credit and funding readiness with you and map out your next steps.
Book a Consultation ›Frequently asked questions
Can I use an SBA loan to buy a business?
The SBA lists changes of ownership, complete or partial, as an eligible use of 7(a) loans. You apply through a participating lender, and eligibility and terms depend on the lender, the business and you.
How much do I need to put down to buy a business?
It depends on the lender, the loan program and the deal. Ask each lender what they require, and plan for closing costs and working capital as well as the purchase price.
Does my personal credit matter when buying a business?
Usually, yes. The SBA notes that loan eligibility for a new business is typically based on the owner's personal credit score, and many lenders ask for a personal guarantee.
Should I hire an attorney and an accountant?
The SBA suggests it. An attorney and an accountant can help you evaluate contracts, financial statements, tax returns and the full cost of buying and operating the business.
