How Much Business Can I Afford To Buy With An SBA Loan?

The Three Limits On Your Price

Buyers often start with the question "how much can I borrow?" With an SBA acquisition loan, the better question is "how much can this business borrow, with me as the owner?" The loan is repaid from the business's cash flow, not your paycheck, so most of the answer comes from the business itself.

Three numbers cap the price you can pay:

1. Your Down Payment cash. SBA requires at least 10% of the total project cost, and at least half of that has to come from you.
2. The business's cash flow. After paying you a reasonable salary, the business must cover all its debt payments at least 1.25 times.
3. The valuation. The total debt used to buy the business cannot be more than the independent valuation the lender orders.

Work out all three, and the lowest one is your ceiling. Most buyers find that one of them is far tighter than the others, and that tells you where to focus.

Limit One: Your Down Payment Cash

For a first purchase, SBA requires a Down Payment of at least 10% of the total project cost: the price plus the working capital and closing costs rolled into the loan. A seller note on full standby can cover up to half of that 10%. The other half has to come from unlimited sources, such as cash you have saved, a gift or retirement funds.

So your cash buys you a project of roughly:

• 20 times your cash, if the seller carries a 5% note on full standby
• 10 times your cash, if you bring the full 10% yourself

Do not count every dollar you have. Leave room for closing costs that are not financed, a few months of personal expenses, and a cushion for the first year of ownership. Most lenders like to see some liquidity left after closing. Our guide to buying a business with 5% down covers the standby math in detail.

Limit Two: The Business's Cash Flow

This is the limit lenders care about most. Start with the business's seller's discretionary earnings (SDE): its profit before the owner's salary, interest, depreciation and one-time or personal expenses. Then adjust it the way a lender will:

• Subtract your own salary. SBA requires that the owner's pay be enough to cover the owner's personal obligations and living expenses. If you will draw $150,000 a year, take that out.
• Subtract what the business must reinvest. Trucks, equipment and software wear out. Lenders look at what the business has historically spent to keep running.
• Use the history, not the forecast. The lender tests the last fiscal year or the average of the last two. Your growth plan is evaluated but cannot be used to pass the test.

What is left is the cash available for debt service. Divide it by 1.25, SBA's minimum coverage for a business purchase, and you have the most the business can pay toward all of its debt each year. That includes the SBA loan and any seller note that is being repaid. A note on full standby takes no payments, so it does not count here.

Your lender converts that annual figure into a maximum loan amount using its actual loan terms. You can run the same math in our SBA calculators, and our DSCR guide shows how the test works line by line.

Limit Three: The Valuation

Every SBA acquisition needs an independent business valuation from a credentialed appraiser, ordered by the lender. Two rules flow from it:

• The total debt used to buy the business, including any seller note that is not on full standby, cannot exceed the valuation.
• If you agree to a price above the valuation, you make up the difference with more Down Payment.

For small businesses, appraisers often land at a multiple of SDE that depends on the industry, size, customer concentration and how much the business depends on the owner. Asking prices are set by sellers and their brokers. Valuations are set by appraisers looking at the same tax returns the lender sees. When the two disagree, the valuation wins. Read how to value a business to estimate it before you make an offer.

Worked Example: Backing Into A Maximum Price

Say you have $210,000 in savings, and you want to keep $35,000 in reserve. That leaves $175,000 for the Down Payment. You are looking at an electrical contractor with $700,000 of verified SDE over the last two years.

Here the valuation is the tightest limit. Your cash could support a $3.5 million project, but the appraiser supports $2.1 million, so that is the realistic top of your offer. At a $2,100,000 price, with $90,000 of working capital and closing costs, the deal looks like this:

The last check is the cash flow: the lender confirms that the annual payments on a $1,971,000 loan, plus any other debt, stay under $416,000. If they do, the deal works on all three limits. You also keep $65,500 of your Down Payment money unspent, which you can hold as extra reserves or use to put more down.

Real loans we placed. Borrower and lender names are kept private. See all closed deals.

How To Raise Your Ceiling

If one limit is holding you back, here is what moves each one:

• Cash is the limit. Ask the seller for a 5% note on full standby, add a gift from family, or bring in minority investors. Investor money and standby notes together can cover no more than half the Down Payment. See the SBA Down Payment guide.
• Cash flow is the limit. Move part of the seller's financing onto full standby so it carries no payments, or include the building and finance it over a longer term. A lower price also works, and so does a business with more verified earnings.
• The valuation is the limit. You can pay more than the valuation, but only with extra Down Payment. Many buyers negotiate the price toward the appraised value instead. Read negotiating price and terms.

A Quick Self-Check Before You Shop

Before you browse listings, write down three numbers: the cash you can put in after reserves, the salary you need to live on, and the industries you know. Then, for any listing, take the SDE, subtract your salary and normal reinvestment, and divide by 1.25. If the result is not comfortably above what the debt will cost each year, move on.

The fastest way to get a real answer is a pre-qualification letter. We look at your finances and the business's numbers, and tell you what price and structure lenders will support, before you spend money on diligence. For the full product overview, see SBA business acquisition loans.