TL;DR: ETA buyers typically finance acquisitions with three layers: 50-70% senior debt (usually SBA 7(a)), 10-20% seller financing, and 15-30% equity. Understanding how each layer works, what it costs, and where deals break down is the difference between closing and losing the deal at the last minute.
Most people underestimate how complex acquisition financing is until they are weeks from close and something breaks. The SBA changes a standby requirement. The seller balks at the note structure. The equity raise comes in short. Any one of these can kill a signed LOI.
This is not abstract. The Stanford Graduate School of Business Search Fund Study tracks searchers through the entire acquisition process. The deals that close share one characteristic: operators who understood the capital stack before they ever sent a letter of intent.
Here is what that capital stack looks like, layer by layer, and what you need to know before you structure a deal.
The capital stack in a small business acquisition
Every acquisition is financed through a hierarchy of capital sources. Senior debt sits at the top. It gets paid first and carries the lowest risk. Equity sits at the bottom. It absorbs losses first and captures the most upside. Between those two layers, you typically find seller financing.
For a search fund or self-funded ETA acquisition, the typical structure looks like this:
- Senior debt (SBA 7(a)): 50-70% of total project cost
- Seller note: 10-20% of purchase price
- Buyer equity: 15-30% of purchase price
The specific percentages depend on deal size, business cash flow, and what the SBA lender will underwrite. But this is the standard architecture. Deviate from it and you need a good reason.
SBA 7(a): the workhorse of ETA financing
The Small Business Administration 7(a) program is the dominant financing vehicle for US-based ETA acquisitions. In fiscal year 2024, the program approved 70,241 loans totaling $31.1 billion, a 4.2% increase from the prior year. That number has been climbing since 2023 regulatory changes expanded borrower eligibility and increased lender authority.
For an ETA buyer, the relevant parameters are:
- Maximum loan amount: $5 million per borrower
- Typical financing: Up to 90% of total project cost (purchase price plus allowable closing costs)
- Loan term: 10 years for business acquisitions; 25 years when real estate is included
- Interest rate: Prime plus 2.25-2.75%, fully variable. As of mid-2025, the SBA reports average blended rate of approximately 10.32%, down modestly from the FY2024 peak of 11.13%
- Personal guarantee: Required from all owners with 20% or more equity
- Equity injection: Minimum 10% of total project cost from the buyer
That 10% equity injection requirement is the number that shapes everything else in the deal structure. On a $3 million acquisition, you need at least $300,000 in equity. On a $5 million acquisition, $500,000. The SBA requires documented proof of where those funds come from.
Acceptable sources include personal savings, proceeds from asset sales, and properly structured seller notes. Borrowed funds do not count.
Why the seller note matters
A seller note is deferred purchase price. The seller agrees to receive a portion of what you owe them over time rather than at closing.
For the buyer, the seller note does two things. First, it reduces the cash you need to close. Second, when structured correctly, it counts toward the SBA's equity injection requirement.
For the seller, it provides installment sale tax treatment, which spreads capital gains over multiple years. That matters to sellers in high tax brackets. It also keeps the seller's financial interest aligned with a successful transition: if the business fails, the note fails.
Typical seller note parameters in search fund transactions:
- Size: 15-25% of purchase price is most common; the range runs 10-30%
- Term: 3-7 years; 3 years is the median in ETA deals
- Interest rate: 4-6%, below market rate for subordinated debt because the seller is motivated to close
- Payment structure: Often interest-only for the first 1-2 years, then amortizing; this preserves cash flow during the critical transition period
The SBA standby trap
Here is where deals die late. Most ETA buyers know they need a seller note. Fewer understand the SBA's standby requirement.
For a seller note to count toward the SBA equity injection, it must be placed on full standby for a minimum of 24 months following loan close. During that standby period, no payments of principal or interest can be made on the seller note. None.
The standby requirement must be embedded in the note instrument itself, not in a side letter or separate agreement. The SBA will review the note at closing. A note that does not contain explicit standby language will not qualify as equity, which means the buyer faces a capital shortfall at the last possible moment.
After the 24-month standby period, payments may resume only if the business meets the SBA's prescribed debt service coverage ratio at that time. If the coverage test is not met, payments remain suspended until it is.
Sellers who expect to receive regular payments during the note period do not understand what they agreed to. You need to explain this clearly before the LOI is signed, not during due diligence.
How the equity layer fits
Equity in an ETA deal can come from two sources: the operator personally and outside investors.
In a traditional search fund, institutional search fund investors provide capital for the search phase and then convert or roll into the acquisition. According to the Stanford 2024 Search Fund Study, the median equity check in a traditional search fund acquisition is approximately $5.3 million, representing roughly 40% of enterprise value. This is because traditional search fund deals tend to be larger and less reliant on SBA debt programs.
Self-funded searchers using SBA 7(a) financing work in a different range. On a $5 million acquisition with maximum SBA coverage, the buyer may need only $500,000 to $750,000 in equity. That is the structural advantage of the SBA program: it compresses the equity requirement to a fraction of what conventional financing demands.
The tradeoff is personal guarantee exposure. You are signing personally for the SBA loan. If the business fails, you are on the hook.
This is why acquisition due diligence matters before you commit capital. The financing structure does not change the quality of the business you are buying. It only determines how exposed you are when the business underperforms.
Where acquisition financing breaks down
The most common failure points are predictable:
DSCR below 1.25x. The SBA requires the business to generate enough cash flow to cover debt service at 1.25 times on the senior loan alone. If the purchase price stretches the deal beyond what cash flows can support, the SBA lender will not approve it. No amount of seller motivation or creative structuring fixes a negative DSCR.
Seller refuses the standby note. Some sellers will not accept a note with a 24-month payment freeze. If this comes up in negotiation, you either need to replace the seller note with a different equity source or find a deal where the seller understands the structure before you get to LOI.
Insufficient equity injection documentation. The SBA requires evidence of where equity funds originated. Bank statements, asset sale records, and gift letters must be clean and traceable. Equity injections from borrowed funds or unverifiable sources will trigger denial.
Affiliation rule complications. Traditional two-stage search funds with institutional investors can trigger SBA affiliation rules that aggregate investor-controlled entities toward the program's size standard. Self-funded searchers face fewer complications here, but the analysis must happen before you apply.
Building the model before the LOI
The right sequence is: model the capital stack before you make an offer, not after.
You need to know your purchase price range, the business's EBITDA, what debt service the cash flows can support, and how much equity you can raise or inject. From those inputs, work backward to determine what combination of SBA debt, seller note, and equity closes the gap.
The businesses that make sense at 3x EBITDA often do not work at 5x. The capital stack does not lie. If the numbers do not support the structure before you sign the LOI, they will not support it after.
One practical benchmark from the research: at current SBA rates near 10.32%, model blended debt service costs of 9.75-11.5% on the senior loan. Build in a reserve. Businesses underperform in year one more often than they overperform.
The ETA model creates real wealth for operators who close deals that perform. That starts with a financing structure that does not require the business to perform perfectly just to service debt.
Frequently Asked Questions
What is the typical capital stack for a search fund or ETA acquisition?
Most US-based ETA acquisitions use three layers: 50-70% SBA 7(a) senior debt, 10-20% seller financing, and 15-30% equity from the buyer or investors. The SBA 7(a) program covers up to $5 million per borrower at 10-year terms. Seller notes fill the gap between senior debt and the buyer's equity contribution.
How much equity do you need to buy a business with SBA financing?
The SBA requires a minimum 10% equity injection of total project cost, which includes the purchase price plus allowable closing costs. On a $3 million acquisition, you need at least $300,000 in documented equity from acceptable sources: personal savings, asset sales, or a properly structured standby seller note. Borrowed funds do not qualify as equity injection.
Can a seller note count as equity in an SBA 7(a) transaction?
Yes, but only when structured as a full standby note with no payments for 24 months post-closing. The standby requirement must appear in the note instrument itself, not in a side letter. After 24 months, payments resume only if the business meets the SBA's debt service coverage threshold. A seller note that does not contain explicit standby language will not qualify as equity.
What interest rates should you expect on acquisition financing in 2025?
SBA 7(a) rates are priced at Prime plus 2.25-2.75%, with an average blended rate near 10.32% as of 2025. Seller notes typically run 4-6%, reflecting their subordinated position behind senior debt. Mezzanine debt, when used, commands 12-18% total return. The seller note is generally the cheapest layer in the capital stack because the seller is motivated to close.
