Financing Your Purchase
Almost no one buys a business with one pile of money. Here are the six capital sources buyers actually use to close deals in the Upper Main Street and Lower Middle Market, and the stacks they fit into.
The buyers who actually close show up with a stack: senior debt, buyer equity, often some seller financing, sometimes mezzanine or sponsor equity. Below is how each piece works, how the pieces fit together at different deal sizes, and where buyers most often go wrong.
Note: Duran is not a lender. We do not originate loans, underwrite, or recommend specific lenders. We tell you what we see actually work on real deals, and we introduce you to qualified financing partners when it makes sense.
How the stack changes with deal size
Three typical capital stacks for three different acquisition sizes. Real deals vary, but these are the shapes we see at closing tables.
The exact ratios move with deal size, business risk, lender appetite, and what the buyer brings to the table. The pattern that stays true: senior debt does the heavy lifting under $5M, equity and mezzanine fill in as deals get larger, and seller paper is almost always somewhere in the structure.
The six capital sources
Each piece, what it costs you, who it fits, and where it gets you in trouble.
SBA 7(a) financing
A government-guaranteed loan from SBA-approved lenders. The workhorse for owner-operator deals under $5M, with longer amortization than a conventional bank loan and a modest equity injection (usually 10%).
- Deal size
- Up to $5M
- Rate
- Prime + 2.25%-2.75%
- Term
- 10 yrs (25 if real estate)
- Buyer equity
- 10% minimum
- Close time
- 60-90 days
Fits when: Owner-operator deal, under $5M, buyer has 10%+ to put in, 60-90 days to underwrite.
Conventional bank financing
Commercial bank acquisition lending against the cash flow and assets of the target. Faster underwrite than SBA and more flexible on structure, but the bank wants a stronger buyer balance sheet and cleaner cash flow to get there.
- Deal size
- $2M-$25M
- Rate
- SOFR + 3%-5%
- Term
- 5-7 yrs with amort
- Buyer equity
- 20%-30%
- Close time
- 45-75 days
Fits when: Established business with documented cash flow, financially substantial buyer, $2M-$25M deal.
Seller financing
The seller carries part of the purchase price as a note, usually 10-30% of the deal. It keeps the seller invested through the transition, bridges valuation gaps, and stands in for senior debt the bank will not put up.
- Typical size
- 10%-30% of deal
- Rate
- 6%-9%
- Term
- 3-7 yrs, often standby
- Security
- Subordinated to senior
- Close time
- Negotiated at LOI
Fits when: Seller wants a clean transition, deal needs gap-filling between bank limit and buyer cash, or buyer wants less dilution from outside money.
Equity (sponsor or partner)
Outside equity capital from a financial sponsor, family office, or independent-sponsor / search-fund principal. It funds the equity portion and brings governance and operating experience, in exchange for diluting the operator's ownership.
- Deal size
- $5M+
- Return target
- 20%-30% IRR
- Hold period
- 5-7 yrs
- Dilution
- 50%-80% to sponsor
- Close time
- 90-120 days
Fits when: $5M+ deal, operator-buyer needs financial backing, sponsor brings real operating expertise, not just money.
Mezzanine debt
Junior to senior bank debt, senior to equity, often with warrants attached. Fills the gap between senior debt and equity: more expensive than the bank, cheaper than giving up more ownership.
- Deal size
- $10M+
- Rate
- 10%-14% + warrants
- Term
- 5-7 yrs, often interest-only
- Equity kicker
- 2%-10% warrants
- Close time
- 60-90 days
Fits when: $10M+ deal, senior bank caps out before structure has enough debt, bigger equity round would dilute more than mezz costs.
Earn-outs & rollover equity
Earn-out: part of the price is contingent on what the business does after closing. Rollover equity: the seller takes equity in the acquiring entity instead of all cash. Both bridge valuation gaps and align seller incentives with the buyer's.
- Earn-out size
- 10%-30% of price
- Earn-out term
- 1-3 yrs post-close
- Rollover size
- 10%-30% of equity
- Tax efficiency
- Roll defers gain
- Risk
- Earn-out disputes common
Fits when: Valuation gap, sponsor buyer wants seller engaged post-close, or seller wants a piece of the upside.
A worked example
What this looks like for a real deal: a $2.5M HVAC business with a 10-year track record and one owner-operator buyer.
$2.5M HVAC acquisition, SBA + seller note + buyer equity
Owner-operator buyer with $250K liquid, a 720+ credit score, and 8 years in the trade. Seller wants a clean exit but is willing to carry a small note to bridge the valuation gap. SBA-preferred lender approves in 71 days.
- SBA 7(a), 10-year amort, Prime + 2.5% $1.95M (78%)
- Seller note, 5-yr standby, 7% $300K (12%)
- Buyer equity (cash + retirement rollover) $250K (10%)
Side-by-side comparison
The six sources at a glance. Use the tiles above to decide; use this to verify the trade-off.
| Source | Typical deal size | Cost | Speed to close | Personal guarantee | Trade-off |
|---|---|---|---|---|---|
| SBA 7(a) | Up to $5M | Prime + 2.25-2.75% | 60-90 days | Required | Slowest underwrite, most paperwork |
| Conventional bank | $2M-$25M | SOFR + 3-5% | 45-75 days | Often required | Higher equity injection (20-30%) |
| Seller note | 10-30% of deal | 6-9% | At LOI | Subordinated | Seller stays involved past close |
| Sponsor equity | $5M+ | 20-30% IRR target | 90-120 days | Generally no | Significant operator dilution |
| Mezzanine | $10M+ | 10-14% + warrants | 60-90 days | Limited | Expensive, warrants dilute |
| Earn-out / rollover | 10-30% of price | Contingent on performance | Doc'd at LOI | No | Earn-out disputes are common |
Common buyer questions
The questions we hear most often from buyers walking into their first acquisition.
How much money do I actually need to put down?
For an SBA 7(a) loan, the minimum equity injection is 10% of the total project cost, and at least half of that has to be your own money (the rest can sometimes be seller paper on standby). For a conventional bank loan, expect 20-30% buyer equity. So on a $2M deal: about $200K for SBA, $400-600K for conventional.
Buyers who close with less are almost always combining SBA with a seller note on standby, or bringing a sponsor co-investor onto the cap table.
What credit score do I need for SBA financing?
Most SBA-preferred lenders want a personal FICO of 680+, and the strongest underwrites happen at 720+. The SBA itself runs a separate score called FICO SBSS, where 155+ clears the threshold most lenders use. Below 680 you are looking at a much narrower lender list and tougher terms, but not impossible — particularly if the deal itself is strong.
Can I combine SBA financing with a seller note?
Yes, and it is one of the most common structures we see. The seller note has to be on full standby (no principal or interest payments) for the first two years to count toward the buyer's equity injection. After the first two years it can convert to a standard amortizing note. This is the structure that lets a buyer with 5% cash close a deal that normally requires 10% down.
How long does it actually take to close?
SBA 7(a): 60-90 days from accepted LOI. Conventional bank: 45-75 days. Sponsor-backed deal: 90-120 days. Add 30 days if there is real estate in the mix, or if the seller financials need significant cleanup.
The piece most buyers underestimate is quality of earnings. A clean QoE shortens every other step. A messy one stops the deal cold.
Do I need a sponsor for a deal under $5M?
Usually not. Deals under $5M are mostly owner-operator transactions financed with SBA 7(a) + seller note + buyer equity. Sponsors enter the picture when the deal is too big for SBA, when the buyer needs an experienced governance partner, or when the buyer's personal balance sheet is not deep enough to clear the bank.
What does Duran actually do on financing?
We are not lenders. We do not underwrite, originate, or recommend specific lenders. What we do: flag stack assumptions at the LOI stage if a proposed structure puts the deal at risk, and introduce qualified financing partners when it makes sense. The financing relationship is between you and your lender. Our job is to keep the deal closeable.
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