6. Financing the Deal

You can find the right business at a fair price and still lose the deal over the money. And the money is almost never a single loan. Host John Lay, founder of Three Circles Agency, walks the real menu of how regular people pay for a business.

Sources:

• Brown & Earle (2017), Journal of Finance — financing access causally drove ~3-3.5 jobs per $1M lent. 
• Robb & Robinson (2014), Review of Financial Studies — small firms run on external/bank debt; the personal guarantee is normal “levered equity.” 
• Spence (1973), QJE — a seller carrying paper is a credible, costly-to-fake signal (Nobel, 2001). 
• Thaler (1988), Journal of Economic Perspectives — the winner’s curse; over-borrowing is the financing version.
• SBA 7(a): max $5M, ~10-year acquisition term, rates tied to prime with SBA caps; SOP 50 10 8 (eff. June 1, 2025): ≥10% equity injection, ≥5% own cash, seller note counts toward injection only on full standby and ≤50% of the injection, personal guarantee for owners of 20%+. SBA requires a fixed, determinable purchase price, so earnouts generally are not used in SBA-financed deals. SBA 504 for owner-occupied real estate / fixed assets. Prime ~6.75% (mid-2026); 7(a) acquisition rates roughly 9.75-11.5%.
• DSCR benchmark ~1.25x for acquisitions. 
• Owner/seller financing appears in ~75-90% of completed deals under $5M (IBBA-type broker data; BizBuySell); ~62% of buyers want it vs. ~23% of sellers planning to offer it; many lenders now require ~10% seller note. 
• Seller note typically 10-30% of price, 5-7 years, high single digits. 
• Seller financing associated with ~10-15% higher price, faster closings, and installment-sale tax spreading (IRC §453). 
• Conventional acquisition loans typically require 20-30% down. 2025 SBA rule changes linked to ~30-day-longer closings (BizBuySell Q2 2025).
• All figures are subject to change.

Disclaimer. Job or Asset is produced by Three Circles Agency (TCA) and is provided for general informational and educational purposes only. It does not constitute, and should not be relied upon as, legal, tax, accounting, financial, investment, valuation, or medical advice, and it is not a solicitation or offer to buy or sell any business, security, or financial product. Listening to this podcast, contacting TCA, or downloading any TCA material does not create an attorney-client, accountant-client, fiduciary, broker, or advisory relationship of any kind. TCA is a business-consulting firm. It is not a law firm, accounting firm, registered investment adviser, broker-dealer, or licensed business broker, and it does not provide legal, tax, or investment advice. Always consult your own qualified, licensed professionals before making any decision regarding the purchase, sale, financing, structuring, taxation, or operation of a business or practice. Statistics, multiples, interest rates, and figures mentioned are believed accurate as of the recording date but are general in nature and subject to change; they may not apply to your situation. Academic research is cited to illustrate ideas and mechanisms; practitioner and industry figures are estimates that vary by business, market, and time. Any client examples are illustrative composites and do not depict real, identifiable clients. The views expressed are those of the host. TCA makes no warranty as to the a...

Transcript

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Here's the hard truth about buying a business. You can find the right business, agree on a fair price, and still watch the whole thing fall apart over one thing, the money. And here's the part nobody tells you. The money is almost never a single loan from a single bank. A real deal is built from pieces stacked together, and the pieces you pick decide whether you end up with an asset or a noose. Most buyers think financing is the boring part you handle after the real decisions. It is not. How you put the money together is one of the most important decisions in the entire deal. Get it right, and an ordinary person can buy a real business. Get it wrong, and you can bury yourself in debt buying a job. Today I'm going to show you the whole menu in plain language and how regular people actually pay for a business. I'm John Lay. This is Job or Asset. Welcome back. I'm John Lay. I run a firm called Three Circles Agency, and we sit with buyers, sellers, and advisors in a room where businesses change hands. This one is for the buyers, and it's the episode people are most afraid to ask about because nobody ever taught them how a regular people actually afford to buy a whole business. So let me reframe it right at the top. There's no single way to pay for a business. There's a menu. And almost every real Main Street deal, call it $350,000 to $5 million, is paid for with a combination of pieces, not one big loan. Two of those pieces show up on nearly every deal, so we'll treat them as the two pillars. The first is a bank loan. The second is money the seller themselves agrees to finance. Then there are smaller pieces that fill the gap, your own cash, money pulled from a retirement account or a home, and sometimes an outside partner. Today I'll walk the whole menu, show you the one number every lender cares about most, and show you how to combine the pieces so the deal is sturdy instead of fragile. Here's how it ties to the picture we carry all season, the risk pendulum. How you combine these pieces decides which way the pendulum hangs after you sign. A smart combination keeps the risk shared. A reckless one dumps all the risk on you the moment the ink dries. Same price, same business, completely different outcome, decided entirely by how you paid. As always, this is education, not financial or legal advice. Bring in real professionals for your actual deal. But by the end, you'll know the menu well enough to tell a sturdy structure from a noose, job or asset. Today the money decides. Let's go. Let's start with a big idea because once you see it, everything else clicks. Professionals call it the capital stack. That sounds fancy, it just means the pieces of money that add up to the purchase price. Picture a Main Street deal in layers. At the base, the biggest piece usually is a bank loan. On top of that, a seller note, money the seller agrees to carry, that is, and at the very top, your own cash. Add the pieces together and they equal the price. That's the realistic shape of almost every deal at this size. Not a hero with a giant pile of cash, a stack, built from a few sources. Here's why the mix matters so much. Each piece has a different cost and a different level of risk. A deal with a smart mix can absorb a rough patch and survive. Two buyers can pay the identical price for the identical business, and one ends up with a sturdy deal and the other ends up with a noose. The whole difference is how they built the stack. Before we walk the menu, let me kill a myth that stops good people from ever trying. There's a study by Alicia Robb and David Robinson in the Review of Financial Studies that looked at how businesses actually get funded. The finding surprises people. Businesses run far more on outside debt, especially bank loans, than on family money or the founder savings. Bank financing and their data dwarfed friends and family money by something like seven to one. If you've been telling yourself you can't buy a business because you don't have a pile of cash or a rich uncle, the data says you've misunderstood the game. Businesses are bought with borrowed money combined well. That is not a workaround. That is the normal way that it's done. And the financing genuinely works. A landmark study by Brown and Earle in the Journal of Finance tracked companies that got SBA loans against similar ones that didn't. They found that financing access causally produced real growth on the order of three to three and a half new jobs for every million dollars lent. Used right, financing is not a burden. It's the thing that lets you own and grow a real asset. The trick is combining the pieces so the pendulum stays on your side. So let's walk the menu, starting with the first pillar, the bank loan. The first pillar is a bank loan, and even here you have choices. Let me give you the real menu because too many buyers assume there's only one door. The most common door on Main Street is the SBA 7A loan. The SBA is the small business administration, a government agency. One point that confuses people is that the SBA does not lend you the money. A regular bank does. The SBA promises the bank that if you fail to pay, the government covers a large part of that loss. Because the bank is protected, it's willing to lend to ordinary buyers it would otherwise turn away. That guarantee is the whole magic, and that's why roughly two out of three Main Street buyers who borrow use the 7A. As of mid-2026, the maximum loan could be $5 million. The term for buying a business is usually 10 years, paid down steadily, with no balloon at the end. Rates are tied to Prime around 6.3 quarters percent as of mid-2026, with the SBA capping what the bank can add. For a typical acquisition, that puts the rate roughly at 9.5% to 11.5%. The down payment, what they call the equity injection, is at least 10% and at least 5% has to be your own cash. And anyone who owns 20% or more signs a personal guarantee, which means if the business fails, the bank can come after your personal assets. That guarantee stops people cold. So hear this. Robin Robinson found that personally backed debt is normal for small business owners. Nearly every person who has bought a business this way signed that same guarantee. It's not a trap, it's the price of admission. The lesson isn't to avoid it, it is to combine the pieces so well that you never have to test it. One honest current wrinkle. The SBA tightened its rules in mid-2025 and brokers report it's slowing deals down. Closings are running about a month longer than the year before. That's not a reason to avoid the SBA, it's just a reason to know your other doors, so a delay or a no doesn't end your deal. So, what are the other doors? Door two is a conventional acquisition loan, a straight bank loan with no government guarantee. The trade is simple. The bank usually wants more money down, often 20 to 30% instead of 10 and tighter terms. But for a strong buyer with a strong business, it can close faster and carry fewer strings than the SBA. Door three, if the business comes with a building or heavy equipment, is the SBA 504 loan, which is built specifically for real estate and big fixed assets, often at a lower long-term fixed rate. You don't need to memorize these, you just need to know that they exist so that when one door is slow or shut, you can ask about the next one instead of just walking away. That is the whole point of treating this as a menu. Now, maybe the most important number of this entire episode, and it doesn't care which door you use, it governs any loan you take. So slow down with me. It's called the debt service coverage ratio. After the business pays its bills and pays you a fair salary, does it generate enough cash left over to cover the loan payments? You take the yearly cash flow and divide it by the yearly loan payments. If the answer is exactly one, the business makes just barely enough and not a penny more. Lenders hate that, so they want a cushion. For acquisition loans, the standard benchmark is about one and a quarter, about a dollar and twenty-five cents of cash for every dollar of loan payment. That extra 25 cents is what gets you approved and lets you sleep at night. So here's the arithmetic on a napkin. A business throws off $200,000 a year in cash after paying you a fair salary. Loan payments are $150,000 a year. $200,000 divided by $150 is $1.33. The lender smiles. Now, imagine the price was higher and the payments were $190,000. Same cash flow divided by $190, about $1.05. Technically, the business covers the loan, but one slow month, one lost customer, and you're writing the bank a check out of your own pocket. Same business. The only thing that changed was how much debt you can stack on it. That's the entire game. The number is the pendulum written as math. A ratio of exactly one means the deal only works if everything goes perfectly. A ratio of one and a half means the business could lose a third of its cash flow and still pay the bank. That cushion is the pendulum sitting safely on your side. And here's the thing that it protects you from buying a job with a loan staple to it. If the only way the payments work is for you to grind 70 hours a week and take no salary, the coverage really doesn't work, and a good lender will catch it. Now the second pillar. And I'm giving it equal billing with the bank loan on purpose because the data says it belongs there. Owner financing. Also called seller financing or a seller note. The person selling the business agrees to let you pay part of the price over time with interest instead of all at once at closing. The seller becomes, in effect, one of your lenders. First-time buyers think this is rare. It is not. Industry data from the business brokerage world says owner financing shows up in something like 75 to 90% of completed deals under $5 million. One veteran MA advisor put it plainly. They're seeing at least some owner financing on almost every transaction now. And here's the part that surprises most people. Many lenders now require a seller note, often around 10%, before they'll fund the rest. So this isn't a nice surprise you'd hope for. On a Main Street deal, it's close to standard, so plan for it. Now, here's the real gap worth knowing about because it's where deals get stuck. Surveys show roughly 60% of buyers want seller financing, but only about a quarter of sellers walk in planning to offer it. So part of your job as a buyer is to help a nervous seller understand why it's in their interest too. And I'll come back to that. But here's the deepest reason owner financing matters, and it connects to everything we've talked about all season. When a seller finances a meaningful chunk of the price, they're making a statement. A signal is what it is. The economist Michael Spence won a Nobel Prize for the idea that the most believable signal is one that would be costly or foolish to send if you were lying. A seller carrying paper is exactly that. They are betting their own money, money they could have walked away with at closing, that this business will keep performing after they leave. The person who knows this business better than anyone on earth is voluntarily keeping some risk on their side of the table. That is the most honest vote of confidence you could get. And flip it around. If a seller flatly refuses to carry a single dollar and demands all cash today, you're allowed to wonder why they're in such a hurry to be completely free of it. Sometimes the answer is innocent. Sometimes it's the most important thing you learn in the entire deal. The typical shape. The seller finances around 10 to 30% of the price on a note of about five to seven years at a rate often in the highest single digits. And since it's a negotiation, here's what to ask for: the rate, the length, because a longer note means smaller payments early. Whether the first few months can be interest only to ease the transition and an offset right, which means if you discover after closing that the seller misrepresented something, you can reduce what you owe on the note instead of chasing them in court. That offset right is a pool of the seller's money that stays within your reach for years in case a hidden problem surfaces. Risk kept on the seller side long after closing. Most first-time buyers never even ask for it. Two practical notes. First, if you're combining a seller note with an SBA loan, the SBA has specific rules that were tightened in 2025. For the note to count towards your down payment, it has to be on full standby, meaning the seller receives nothing, not principal, not interest for the life of the SBA loan, and it can cover no more than half of your required injection. Done right, that's elegant because the seller collecting nothing early, it also lightens your debt load when the business is most fragile, which strengthens your coverage ratio. And something that sellers need to be aware of is offering to carry paper widens their buyer pool. It can raise their price by 10 to 15%. Deals close a month or more faster, and spreading the payments can spread their tax bill over years instead of one big hit. Owner financing isn't the seller doing you a favor. Done right, it's good business for both of you. So the bank carries the big piece, the seller carries a piece, and you bring the top of the stack, which is your own money. The question I get most is where does that come from if I don't have a hundred thousand dollars sitting there in checking? A few real sources, and you want a professional on each one. Savings, plainly if you have them. Home equity, borrowing against a house, though understand you're putting both the house at risk twice over, so trade carefully there. There's a structure that lets you fund a purchase from a retirement account without the early withdrawal penalty, sometimes called a rollover for business startups, which is not debt, but has real rules and real risk and is not something to do off of a podcast. And, as we've covered, a standby seller note can cover part of the injection. I list these not to recommend one, but to break the myth that you need to hold down payment in cash. You usually don't, but every one of these changes your risk. So it's exactly the kind of thing you map out with someone who's done it before, not something you improvise. Job or asset, watch the pendulum, even when you're funding your own slice. Beyond the two pillars in your own slice, a couple more tools, especially as deals get to the larger end of Main Street deals. The first is a capital partner. An outside investor puts money in to help you buy in exchange for a share of ownership or a return. The trade is simple. You give up some upside in exchange for being able to do the deal at all and for not carrying every dollar of risk alone. A good partner changes the way the pendulum hangs because someone else's money now absorbs part of the blow in a rough year. The deals we help put together at Three Circles Agency often have a buyer taking a majority and a capital partner a minority, with the seller carrying some paper, all three aligned, so no single person carries a risk that should be shared. The second is the earnout. And I want to be precise about it because the rules matter. An earnout means part of the price gets paid later and only if the business actually performs the way everyone expects. It's a genuinely useful tool for bridging a disagreement about value and keeping the seller motivated after the sale. But here's the catch most buyers do not know. You generally cannot use an earnout in an SBA finance deal. The SBA requires the purchase price to be fixed and known at closing, so a contingent payment doesn't fit that. The tool that does the same job inside of an SBA deal is the standby seller note. So if you're going the SBA route, think seller note, not earnout. If you're doing a conventional or cash deal, the earnout is back on the table. Knowing which tool fits which door is exactly the kind of thing that keeps a deal from blowing up late. Don't let the jargon scare you off structures that when used well are how a buyer with more ambition gets cash to own something real. Now, let me name the danger underneath all of this because it's the one that hurts buyers most. Too much debt. It's tempting when you really want a business to stack on as much debt as possible just to get the deal done. But every layer of debt is a fixed payment that does not care whether you had a good month. Pile on too much and the first slow season can push you underwater. Build a stack the business can comfortably carry with a real cushion, even in a bad year. A deal that only works if everything goes perfectly is not a strong deal, that's a bet. And because of that personal guarantee, you're betting your house on it. Let's put the whole menu together in one example so you can see how the pieces combine. A solid business is priced at a million dollars. The buyer covers the bulk, say $800,000 with a loan over 10 years. The seller carries $150,000 on a standby note, signaling real confidence and easing the early cash crunch. And the buyer brings the last $50,000 themselves, clearing the 5% of your own money rule, with a standby note covering the rest of the injection. A person who did not have a million dollars in the bank just bought a million dollar business. And look at how the risk got shared. The bank has skin in the game but is protected. The seller has $150,000 riding on the business performing after they leave, which keeps the pendulum on their side through the handoff. And the buyer has real but survivable exposure with a coverage cushion underneath. That's not a trick. That's just a good combination, with a risk spread instead of dumped onto one person. That's the whole point of understanding the menu. Not so you can do it alone, but so you can sit at the table and recognize a strong combination from a fragile one. And one quick word for sellers who wandered into this buyer's episode. Everything I described, the standby note, the offset right, the transition, a buyer will ask you for. Offering to carry some paper isn't weakness, it's leverage. It widens your pool, it can raise your price, and it signals confidence that makes a nervous buyer relax and pay closer to full value. Job or asset. When the combination shares the risk and the business can carry it, you've built an asset. You don't buy a business with a single loan. And you don't buy it with a pile of cash. You build it from pieces. A bank loan, the seller's own financing, your money on top, and sometimes a partner. There's a whole menu, and almost every real deal uses a combination. The goal is to never use the most debt you can get approved for. The goal is to combine the pieces so the business can comfortably carry them even in a bad year, with the risk shared instead of dumped all on you. A smart combination lets an ordinary person own a real asset. A reckless one buries a good person under a job they overpaid for. So you need to know the difference before you sign. If you're thinking about buying, don't start by falling in love with a business. Start by understanding what you can actually finance and combine well. That's what protects you. Book a free 15-minute call at joborasset.com. A real person, 15 real minutes, no pitch, no pressure. We figure it out honestly whether we can help. If we can, you walk away with a code for our business ownership readiness checkup. And if you're a seller wondering whether to offer financing, the exit readiness checkup covers your side. And one more time because it matters. On the actual loan documents and the SBA rules, work with real lenders and real advisors. We help you build the structure and bring the right people to the table, and we stay beside you through the close. We don't just point you at a bank and wave goodbye. I'm John Lay. This has been Job or Asset brought to you by Three Circles Agency, and one quick and important note before we go. Job or Asset is for general education only. It isn't legal, tax, accounting, financial, investment, or medical advice, and listening does not create any client or advisory relationship with Three Circles Agency. Every business and every deal is different, and laws, rates, and figures change. So before you act on anything you hear here, talk to your own qualified professionals. The stories are illustrative and not real clients, and the views are mine. With that said, we'd be glad to help you get prepared. Start at joborasset.com. And before you really go, next time we head back to the seller side, to one of the most misunderstood pieces of value in a business your reputation. Most owners think a great reputation sells the business for them. It does not, at least not yet.