A $1,000,000 acquisition structured line by line — equity, seller note, and bank debt — with the debt-service coverage test that actually determines whether it funds.
June 19, 2026 · Relief Capital Funding Desk
An acquisition loan funds the purchase of an existing company, and it is sized primarily against that company's cash flow rather than yours. This is the detail that reorders everything people assume about borrowing. You are not asking a lender to bet on your business's capacity to service new debt; you are asking it to bet that the business you're buying will keep producing the earnings it has produced, and that those earnings will cover the loan used to buy it. The target's tax returns matter more than your own.
That's why diligence is heavier here than anywhere else on this site. Expect a lender to want two to three years of the target's financials and returns, a quality-of-earnings view on any add-backs, the customer concentration picture, the lease, and a transition plan showing what happens when the current owner leaves. Sixty to ninety days from letter of intent to funding is normal. Clean books on the seller's side shorten that materially; a seller who runs personal expenses through the business and reconstructs the numbers from memory can extend it indefinitely. It's worth understanding why lenders care so much about add-backs specifically. Every dollar a seller adds back to earnings — the car, the family member on payroll, the one-off legal bill — raises the price at whatever multiple the deal is struck on, and simultaneously raises the debt the earnings have to cover. An add-back that can't be documented isn't a disagreement about accounting; it's a disagreement about whether the loan gets repaid.
The other structural fact is that acquisitions are almost never financed with debt alone. A typical deal layers buyer equity, a seller note, and bank or SBA debt, and each layer does a different job. Your equity proves commitment. The seller note keeps the previous owner financially interested in a smooth handover — which is worth more than it costs. The senior debt does the heavy lifting. Lenders read a seller's willingness to carry paper as a signal about whether the seller believes their own numbers, and a refusal to carry any is worth asking about.
Two minutes with the desk beats two hours of tabs
Have an LOI or a seller's P&L? A short call is usually enough to tell you whether the deal supports the debt.
Typical acquisition loan range
$50,000 – $5,000,000
Indicative; final terms depend on lender and profile.
Debt-service coverage lenders commonly want
1.25×
Indicative; the coverage ratio required varies by lender, industry, and structure.
Structure a representative deal from the top down. A business with $285,000 of seller's discretionary earnings sells for $1,000,000, a multiple of about 3.5. You put in $100,000 of equity, the seller carries a $100,000 note, and $800,000 comes from a bank or SBA lender at an illustrative 10% over ten years — roughly $10,572 a month, or $126,865 a year. The seller note at 6% over five years adds about $1,933 a month. Now the test that actually decides the file: take the $285,000, subtract a realistic salary for yourself, say $90,000, and you have $195,000 available to service debt.
Against the bank debt alone, $195,000 over $126,865 is coverage of about 1.54 times. Add the seller note's $23,196 a year and coverage falls to roughly 1.30 times. Both clear the 1.25 threshold most lenders look for, so this deal funds — but notice how little room there is. Pay $1.2 million for the same earnings, or draw $120,000 instead of $90,000, and coverage slides under the line. That single ratio is why two buyers can look at the same business and get opposite answers from the same lender: the price and the owner's draw are the variables, and both are yours to set. Two adjustments do most of the work when a deal is marginal. Lengthening the senior term reduces the annual payment and lifts coverage immediately, which is one reason SBA's longer amortization funds deals conventional debt won't. And putting the seller note on standby — no payments for the first year or two — takes that layer out of the coverage calculation entirely while keeping the seller invested in the handover.
For most deals under $5 million the practical route is SBA Loans — 7(a) is the dominant acquisition product in this size range, with longer terms and a lower injection than conventional acquisition debt usually allows, at the cost of a longer close. If what you're buying is a franchised unit, Franchise Financing brings the brand's own performance data into the underwriting alongside the unit's numbers. And if the target owns its premises, split the analysis: Commercial Real Estate Loans can finance the property on a much longer term than the operating business, which often lowers the blended payment considerably.
The financing question and the deal question are the same question, and the coverage ratio is where they meet. A price that produces 1.6 times coverage gives you room for a bad quarter, a customer loss, and the surprises that follow every transition. A price that produces exactly 1.25 gives you none, and you'll spend your first year as an owner managing a debt schedule instead of a business. If the numbers only work at the seller's asking price with optimistic add-backs, the honest read is that the deal is priced for a different buyer.
Send the LOI and the last three years
Email the target's financials and the price under discussion — you'll get a coverage read back before you spend on diligence.
The target's, by a wide margin, because the loan is sized against the cash flow you're acquiring. Your credit, your liquidity, and your relevant experience still matter — they decide whether you're an acceptable operator for that cash flow — but a strong buyer cannot rescue a weak target's numbers. The reverse is more often true: a genuinely good business with clean books makes an average buyer's file workable.
Very rarely, and you should be sceptical of anyone suggesting otherwise. Lenders want the buyer to have real money at risk, typically around 10% of the price, and will usually want a seller note or some other subordinated layer alongside it. Deals occasionally reach very high leverage with unusual structures, but the coverage test doesn't move: more debt means a bigger payment, and the target's earnings still have to cover it.
Two reasons. It reduces the senior debt, which improves coverage. More importantly it keeps the seller financially invested in the handover going well — a departing owner still owed $100,000 answers the phone in month four. Seller notes are usually subordinated to the bank debt and sometimes carry a standby period where no payments are made, both of which help the ratios on your file.
“You are not buying a business. You are buying its cash flow, then borrowing against it.”
Test the deal before you spend on diligence
A few questions about price, earnings, and what you can inject, and you'll see whether the structure holds.