Buying a business, explained

Buying a business in one picture

Buying a business takes six steps: find it, agree on terms, check it, fund it, close, then run and grow it.

First, find a company that makes money and an owner who wants to sell. You agree on a price and sign an LOI (letter of intent): a short written offer that sets the price and main terms. Next comes diligence, a deep check of the books, customers and contracts. Then you line up the money: a bank loan, a note from the seller, your own cash, and maybe investors. At closing, the money moves and the company is yours. Then the real work starts: making it worth more, called value creation.

The capital stack

A purchase is paid for in layers: mostly a bank loan, then a seller note, then the buyer's own cash.

The capital stack is the money that pays for the project. Our example company earns $1.00M of EBITDA (earnings before interest, taxes, depreciation and amortization), a rough measure of yearly profit. It sells for 4.0x that: $4.00M. Add $250K for closing costs and a cash cushion: the project is $4.25M. The biggest layer is an SBA 7(a) loan, a bank loan backed in part by the US Small Business Administration: $3.83M. Next, a $212K seller note on full standby: the seller lends part of the price and gets no payments until the bank loan is paid off. Last, $212K of the buyer's own cash. Those two are the 10% the buyer side brings.

The 5% rule

As one SBA loan broker reads the new rules, at least 5% of the project must be your own cash, so your cash sets your ceiling.

To buy a whole company with an SBA loan, the buyer side must put in at least 10% of the project cost, called the equity injection. The SBA updated these rules again (SOP 50 10 8.1); one secondary source dates the change to October 1, 2026. As one SBA loan broker reads the new rules, at least half of that 10% must be your own money: your cash, or a personal loan you repay from income outside the business. A seller note on full standby can cover the other half at most, and on the broker's reading, small investors (each under 20%, with no control) can count toward that half too. Divide your cash by 5% for your ceiling: $100K supports about $2.00M, and $250K about $5.00M. One SBA 7(a) loan tops out at $5.00M. Confirm with your lender.

The business pays for itself

In a leveraged buyout, the company's own cash pays down the loan, so in our example the buyer's share grows every year.

A leveraged buyout means buying a company mostly with borrowed money. At 4.0x, the company has about $800K a year left after taxes and upkeep. The loan payment is about $600K, so the DSCR (debt service coverage ratio: cash for loan payments divided by the payments) is 1.33x. The loan shrinks from $3.83M to $2.37M after 5 years, and to zero after 10. With flat earnings and a sale at 4.0x, the buyer's stake starts just below zero on day one (about -$38K, because the loans also paid the closing costs) and grows to $1.35M at year 5. Value creation adds to that: faster quoting, smarter scheduling, a cleaner back office. If earnings grow 5% a year, the stake reaches $2.45M at year 5. A scenario, not a promise.

When the price is too high

If the price is too high, cash no longer covers the loan payment by enough; the fixes are investors or a lower price.

Lenders in our example want a DSCR of at least 1.25x. At 4.0x ($4.00M), the payment is about $600K and the DSCR is 1.33x: it passes. Say the seller wants 5.0x ($5.00M). The project grows to $5.25M, the SBA loan to $4.72M and the payment to about $741K. The DSCR falls to 1.08x: it fails. Fix one: raise $647K from investors, above the 10%. The SBA loan shrinks to $4.08M and the payment to $640K. Fix two: get the price down to $4.28M (4.28x) with no investors. Same $4.08M loan, same $640K payment. Both land at 1.25x.

Where investor money fits

Investor money works best on top of the 10%, it has a price, and not everyone is allowed to invest.

Where it sits. As one SBA loan broker reads the new rules, if investor money is used to meet the 10%, those investors get only tax distributions (cash for the tax on their share of profit) until the bank loan is paid off. Money above the 10% can get regular payouts. Confirm with your lender.

What it costs. In discussions in the Searchfunder community, investors asked for a preferred return of 8% to 12% a year (paid before the buyer shares in profit), their money back first, a step-up of 1.5x to 2.5x, and a 30% to 35% IRR (internal rate of return: their yearly return, counting when money goes in and comes out). A public guide for searchers quotes a 10% to 15% preferred return, a 2.0x to 2.5x step-up and at least a 30% to 35% IRR. A step-up makes their dollars count extra: in our example, $647K at 2.0x on a $5.00M price buys 25.9%.

Who may invest. Since March 1, 2026, every owner of an SBA borrower must be a US citizen or national living in the US. Keep each investor under 20% with no control; in a full purchase, anyone at 20% or more must personally guarantee the loan. Confirm with your lender.

How searchers raised it

Searchers in the community started with people they knew, then widened the circle with public asks and investor lists.

These come from discussions in the Searchfunder community, a members-only network of people looking to buy businesses.

1. Start with your own network. One first-time buyer listed every contact and asked each person who said no to introduce someone else. A big part of his money came that way.
2. Ask in public. Buyers who posted one clear ask drew replies from investors and funds, so have a one-page summary ready.
3. Use investor lists that members share, and match each investor's check size, industry and region.
4. Build the list now. One searcher who was raising money said most investors would rather be asked once there's a signed LOI; others suggested short updates to keep investors warm until then.
5. Screen early: every investor must be a US citizen or national, and each should stay under 20% with no control.

A lower price often beats raising more

Often the cheapest equity is a better price: in our example, paying less beats raising more.

Cases C and D fix the same problem. Both end with a $4.08M SBA loan, a $640K yearly payment and a 1.25x DSCR. In case C the buyer pays $5.00M, puts in $262K, brings in $647K from investors and owns 74.1%. In case D the buyer pays $4.28M, puts in $227K, raises nothing and owns 100%. Sell after 5 years at the same multiple, with flat earnings. In case C the buyer gets back $1.53M, and the investors get $1.40M on their $647K: a 23.8% IRR, short of the 30% they want. In case D the buyer gets back $2.25M. With 5% yearly growth, the buyer gets $3.07M in C and $4.08M in D. A seller won't always say yes, but it's worth asking before you raise.