Business Acquisition Loans: How Buyers Finance Mid-Market Deals
Founders often approach M&A discussions with detailed knowledge of their own business but limited understanding of how buyers actually fund acquisitions. This knowledge gap creates blind spots. A founder who understands buyer financing constraints can structure transactions more effectively, identify which buyer profiles can actually close, and avoid deals that collapse when financing falls through.
In the lower middle market, where transactions typically range from $5M to $25M in enterprise value, financing options vary significantly by buyer type. Individual acquirers, private equity sponsors, and strategic buyers each access capital differently, and those differences shape what they can pay and how deals get structured.
SBA Loans: The Individual Buyer's Tool
For individual acquirers purchasing smaller businesses, Small Business Administration loans remain a primary financing mechanism. The SBA 7(a) program allows loans up to $5 million for business acquisitions, with the SBA guaranteeing 75% to 85% of the loan amount. This guarantee reduces lender risk, enabling financing that banks might otherwise decline.
The structure matters for sellers. SBA acquisition loans require the buyer to inject equity, typically at least 10% of the purchase price in cash or standby seller financing. The SBA also imposes restrictions on what constitutes acceptable equity, limiting creative structures that might otherwise enable smaller buyers to stretch for larger deals.
Interest rates on 7(a) loans currently range from approximately 7% to 10%, depending on loan size and market conditions. Loans without real estate typically carry terms under 10 years. Including real estate in the transaction can extend payments to 25 years, reducing monthly debt service and enabling buyers to afford higher purchase prices.
The SBA's Standard Operating Procedures, updated effective June 2025, tightened underwriting requirements significantly. Borrowers should expect more documentation and scrutiny than in previous years. On the positive side, the elimination of certain wealth tests has made high-net-worth buyers more eligible, potentially expanding the buyer pool for attractive businesses.
For founders, the implication is straightforward: SBA-financed buyers face constraints. They need to qualify the business as SBA-eligible, satisfy lender underwriting requirements, and structure deals within program parameters. Transactions that require flexibility SBA rules do not permit may need different buyer profiles.
Private Credit: The Sponsor's Arsenal
Private equity buyers access a fundamentally different financing ecosystem. The private credit market has grown substantially, with leading firms now managing tens of billions in assets dedicated to middle-market lending.
The scale is significant. Firms like Golub Capital manage over $80 billion in assets. Audax Private Debt oversees approximately $26 billion. Kayne Anderson Private Credit manages over $7 billion specifically in direct lending. These are not niche players; they are major capital sources that compete with traditional banks for sponsor business.
Private credit offers flexibility that bank financing cannot match. Direct lenders can move quickly, structure creatively, and hold entire loans on their balance sheets without syndication delays. For sponsors pursuing competitive acquisitions, this speed and certainty often justifies paying higher interest rates.
The most common structure for sponsored middle-market acquisitions is the unitranche facility: a single loan combining senior and subordinated debt into one instrument. Capstone Partners reports that large-cap unitranche loans currently price at SOFR plus 4.5% to 5%, with core middle-market deals typically 50 to 75 basis points wider.
For founders, the prevalence of private credit means PE buyers can often move faster and with more certainty than might be expected. A sponsor with established lender relationships can secure committed financing within weeks, removing financing contingency as a meaningful deal risk.
Bank Debt: Traditional but Constrained
Traditional bank lending remains available for acquisitions but operates under constraints that affect deal dynamics.
Banks face regulatory capital requirements that limit their appetite for leveraged transactions. They typically require more conservative leverage ratios than private lenders, often capping senior debt at 3x to 4x EBITDA for middle-market deals. This constraint means bank-financed deals often require more equity from buyers, which affects what those buyers can afford to pay.
The advantage of bank debt is cost. Interest rates on bank facilities typically run 100 to 200 basis points lower than private credit alternatives. For buyers comfortable with longer timelines and more restrictive covenants, the savings can be meaningful over the life of the loan.
Banks also maintain ongoing relationships that can provide additional value. Lines of credit, treasury management, and future refinancing all benefit from established banking relationships. Strategic buyers with existing bank relationships often prefer to work within those relationships rather than introduce new capital sources.
Seller Financing: Bridging Gaps
Seller financing, where the founder provides a portion of the purchase price as a loan to the buyer, remains common in middle-market transactions. Understanding when and why seller notes make sense helps founders evaluate proposals more effectively.
Seller notes typically arise in several contexts:
Bridging valuation gaps. When buyer and seller disagree on value, a seller note with performance conditions can bridge the difference. If the business performs as the seller expects, the note gets paid in full. If performance disappoints, the seller shares the downside.
Enabling smaller buyers. Individual acquirers or smaller PE firms may lack the equity or debt capacity to fund the full purchase price. A seller note provides capital they cannot access elsewhere, enabling deals that would otherwise be impossible.
Demonstrating confidence. A seller willing to leave money in the business signals confidence in its future performance. This signal can reduce buyer risk perception and justify higher valuations.
Seller notes carry risk. If the business struggles post-acquisition, the seller may not receive full payment. Subordination provisions, where senior lenders get paid before the seller note, can leave founders exposed if things go wrong. The interest rates on seller notes, typically 5% to 8%, compensate for this risk but do not eliminate it.
The structural position of a seller note matters. Notes with reasonable terms, secured by meaningful collateral, and sitting ahead of significant equity provide meaningful protection. Notes that are deeply subordinated, unsecured, and dependent on optimistic projections may prove worthless if the business underperforms.
Earnouts and Contingent Payments
Earnouts structure a portion of the purchase price as contingent payments based on post-close performance. While not technically "loans," earnouts function as deferred financing from the seller's perspective.
The logic mirrors seller notes: earnouts bridge valuation gaps by making the seller's ultimate compensation dependent on actual results. A buyer uncertain about growth projections can pay a lower upfront amount with meaningful earnout potential. A seller confident in the projections accepts the structure because the earnout will pay out.
Earnouts introduce complexity. Definitions matter: how is EBITDA calculated? What expenses get allocated to the acquired business? Who controls decisions that affect earnout metrics? Disputes over earnout calculations are common, and the leverage typically favours the buyer post-close.
For founders considering earnout structures, the key question is control. An earnout tied to metrics you cannot influence after stepping back is essentially a bet on the buyer's competence. An earnout tied to metrics you can directly affect through a transition period provides more agency but extends your commitment to the business.
Equity and Strategic Alternatives
Not all acquisitions are fully financed with debt. Strategic buyers often fund acquisitions with cash on hand or stock, while private equity buyers contribute equity alongside debt financing.
Strategic acquirers with strong balance sheets can pursue deals without external financing, eliminating financing contingencies and accelerating timelines. Corporate balance sheets across many industries hold substantial cash reserves, providing strategic buyers with significant acquisition capacity without needing to access external capital markets.
Stock consideration introduces different dynamics. A founder receiving acquirer stock becomes exposed to that acquirer's performance. The nominal value at closing may differ substantially from the realised value after holding periods expire and stock can be sold. Lock-up provisions, registration rights, and market liquidity all affect the ultimate economics.
Private equity buyers typically contribute 30% to 50% equity alongside debt financing. The equity contribution represents the sponsor's capital at risk and drives their return requirements. Understanding this dynamic helps founders anticipate how PE buyers think about valuation: they need to generate returns on their equity, which influences what they can afford to pay.
Financing and Deal Certainty
From a founder's perspective, the most important financing consideration may be deal certainty. A buyer who cannot fund the transaction is not a buyer at all, regardless of the headline price they propose.
Signs of financing risk include:
Vague financing contingencies. A letter of intent that conditions closing on "obtaining satisfactory financing" without specifics about sources, timing, or commitment level suggests the buyer has not yet secured funding.
Unfamiliar capital sources. Buyers citing financing from sources with no track record in similar transactions introduce execution risk. Established lenders have proven processes; new entrants may not.
Aggressive timelines. Financing takes time. A buyer proposing to close in 30 days without committed financing is either unrealistic or planning to request extensions.
Lack of diligence materials. Serious buyers backed by institutional capital will request detailed financial information quickly. Their lenders need this information for underwriting. Buyers who do not ask for diligence materials may not have engaged financing sources.
Sophisticated sellers probe financing early in the process. Understanding where the money is coming from, what conditions apply, and what risks might prevent funding separates serious buyers from hopeful ones.
Implications for Founders
Understanding how buyers finance acquisitions helps founders in several ways.
Qualifying buyers. Different financing sources enable different buyer profiles. A founder seeking quick closing should prioritise cash-rich strategics or well-capitalised sponsors. A founder willing to accept seller financing can access individual buyers who could not otherwise afford the transaction.
Structuring creatively. Knowing that SBA loans require equity injections, that private credit can move quickly, and that earnouts bridge valuation gaps enables founders to propose structures that work for specific buyer situations.
Evaluating offers. A $10M offer with committed financing may be worth more than a $12M offer contingent on uncertain funding. The nominal price matters less than the certainty of actually receiving payment.
Financing is not just the buyer's problem. It shapes what deals are possible, what prices are achievable, and which transactions actually close. Founders who understand these dynamics negotiate more effectively.
If you are evaluating buyer proposals and want perspective on financing implications, we are happy to discuss.