Start with sustainable cash flow
Historical earnings must support debt service after normalizing owner compensation, one-time expenses and any changes expected after closing.
Build the sources-and-uses table
| Component | What it represents |
|---|---|
| Purchase price | Cash paid to seller |
| Working capital | Liquidity needed after closing |
| Fees and closing costs | Legal, appraisal, diligence and filing costs |
| Buyer equity | Cash contribution |
| Seller financing | Subordinated note if permitted |
| Bank/SBA debt | Senior financing |
SBA 7(a) can finance changes of ownership
SBA lists complete or partial changes of ownership among eligible 7(a) uses. The lender still evaluates price, valuation, management capability, equity contribution and repayment capacity.
Due diligence is part of credit quality
Review customer concentration, recurring revenue, leases, litigation, taxes, employee dependence, inventory quality and capital expenditure needs. A loan can be affordable on paper but risky if the underlying business has hidden weaknesses.
Model the downside
Test a slower first year, customer loss or margin compression. The acquisition should still have enough liquidity to make debt payments without immediately needing emergency borrowing.
Primary sources and reference material
Structure the financing around the business problem.
Good borrowing matches purpose, repayment source, maturity, collateral and liquidity. Compare the entire credit structure—not a single rate, speed claim or headline loan amount.