34 Terms, A To Z

SBA Business Acquisition Glossary

The words you will hear from sellers, brokers and SBA lenders when you buy a business, explained in plain English. Each term says why it matters for your deal and links to a deeper guide. Policy terms follow SBA SOP 50 10 8.1, effective October 1, 2026.

Get Started Get A Pre-Qualification Letter

L

504 Loan

The SBA 504 loan finances fixed assets such as real estate and major equipment. A typical 504 project has three parts: a bank or other Third Party Lender provides about 50%, a Certified Development Company (CDC) provides up to 40% through an SBA-guaranteed debenture, and the borrower brings about 10%, more for a new business or a special purpose property. A 504 loan does not pay for goodwill, so it is not used for the business portion of an acquisition, but it can finance the building when you buy a business and its real estate on separate loans.

Why it matters when buying a business: If the deal includes the building, a 504 loan can finance the real estate alongside a 7(a) loan for the business.

What Is A 504 Loan

Letter Of Intent (LOI)

A letter of intent is a short, mostly non-binding document that sets out the main terms of a business purchase before the full purchase agreement is drafted. It usually covers the price, the structure (asset or stock), any seller note and its standby terms, working capital, the seller’s transition, exclusivity and the timeline. SBA lenders review the LOI to size the loan and check that the structure fits SBA rules, such as no seller earnout.

Why it matters when buying a business: A clean LOI with SBA-friendly terms saves weeks of renegotiation later.

LOI Guide

A

7(a) Loan

The SBA 7(a) loan is SBA’s main business loan program and the one most buyers use to purchase a business. A private lender makes the loan and SBA guarantees part of it, which lets the lender offer longer terms and a lower Down Payment than a typical bank loan. A Standard 7(a) loan goes up to $5,000,000, and the 7(a) Small and SBA Express versions cover smaller amounts. On an acquisition, a 7(a) loan can pay for the purchase price, goodwill, working capital, equipment, inventory and closing costs in one loan, repaid over up to 10 years with no balloon.

Why it matters when buying a business: Most business acquisitions under $5 million are financed with a 7(a) loan, so its rules shape your whole deal.

SBA Business Acquisition Loan

Add-Backs

Add-backs are expenses added back to a business’s reported profit to show what it really earns for a new owner. Common examples are the owner’s personal expenses run through the business, one-time legal costs, and above-market owner pay. Lenders accept add-backs only when they are reasonable, documented and supportable, and a Quality of Earnings report, when required, must identify and document every one. Unsupported add-backs inflate SDE and EBITDA and make a price look justified when it is not.

Why it matters when buying a business: Lenders size your loan on the add-backs they accept, not the ones on the seller’s listing.

SBA Add-Backs Guide

Asset Purchase Vs. Stock Purchase

In an asset purchase, the buyer’s company buys the business’s assets, such as equipment, inventory, customer lists and goodwill, and usually leaves most liabilities behind with the seller. In a stock purchase, the buyer buys the shares or membership units of the company itself, along with its history and liabilities. SBA finances both. In a stock purchase by an individual, the buyer and the business are co-borrowers. The business valuation’s scope must say which type of sale it is and what is included, including any assumed debt.

Why it matters when buying a business: The structure changes who the borrower is, what liabilities you take on, and your taxes.

Asset Vs. Stock Purchase Guide

B

Blended Maturity

When you buy a business and its real estate together in one SBA 7(a) loan, the loan term is blended: a weighted average of 10 years for the business portion and up to 25 years for the real estate, based on how the loan proceeds are used and rounded to the nearest full year. Everything except the real estate, including soft costs and working capital, counts at 10 years. The alternative is two separate loans, one for the business at up to 10 years and one for the real estate at up to 25 years.

Why it matters when buying a business: A blended term lowers the monthly payment when real estate is part of the deal.

SBA Commercial Real Estate Loan

Business Valuation

For an SBA acquisition, the lender must order an independent business valuation from a qualified, accredited appraiser who works for the lender, not the buyer or seller. The valuation must support the business purchase price. If the price is higher than the valuation, the difference has to come from more equity, not the SBA loan. For business purchase prices of $350,000 or less, the lender may do its own valuation unless the buyer and seller are closely related. Real estate is valued separately through an appraisal.

Why it matters when buying a business: The valuation caps how much debt can go into the deal, so it can change your price or your Down Payment.

Business Valuation Methods

C

Change Of Ownership

Change of ownership is SBA’s term for any loan that funds the purchase of a business or an ownership interest in one. SBA groups these deals into four types: Initial Acquisition (the default, for a new owner), Business Expansion (an existing business buying another in the same industry group), Owner Buyout (existing owners or employees buying out others) and ESOP or Cooperative purchases. Each type has its own Down Payment, cash flow coverage and due diligence rules, set out in Appendix 15 of SBA’s lending rules.

Why it matters when buying a business: The type your deal falls into decides the Down Payment, coverage ratio and whether a QoE is needed.

SBA Business Acquisition Loan

Closing Costs

Closing costs are the fees paid to close the loan and the purchase. On an SBA acquisition they typically include the SBA guaranty fee, the lender’s fees, the business valuation, any real estate appraisal and environmental report, a Quality of Earnings report when required, legal fees, and title and filing fees. Many of these can be financed in the loan as part of the total project cost. Because the Down Payment is measured on the total project cost, financed closing costs raise the Down Payment too.

Why it matters when buying a business: Budget for closing costs early so they do not squeeze your cash at the finish line.

SBA Closing Costs Breakdown

Co-Borrower

A co-borrower signs the loan note alongside the main borrower and is equally responsible for repaying it. In SBA acquisitions, co-borrowers are common: when a person buys 100% of a company’s stock, the person and the company are co-borrowers; when a new holding company buys a business that stays a separate entity, both are co-borrowers. In a partial change of ownership, every new owner, even one buying 1%, is a co-borrower.

Why it matters when buying a business: How you structure the purchase decides who has to sign the note, including investors.

Buying A Business With Investors

D

Debt Service Coverage Ratio (DSCR)

DSCR compares a business’s cash flow to its debt payments. A DSCR of 1.25 means the business earns $1.25 for every $1.00 of loan payments. SBA sets a minimum of 1.25 for an initial acquisition and an Owner Buyout, and 1.15 for a Business Expansion, measured on the last fiscal year-end or the average of the last two. Lenders include the new SBA loan and any seller note that is not on full standby, and many lenders set their own higher minimums.

Why it matters when buying a business: DSCR is the number that decides how big a loan the business can support.

DSCR Guide

Down Payment

The Down Payment is the part of the purchase the buyer funds instead of the SBA loan. For an initial acquisition it is at least 10% of the total project cost, and the lender cannot reduce it. Cash that is not borrowed, gifts and retirement funds are unlimited sources. Seller notes on full standby, other standby debt and money from minority investors are limited sources that together can cover no more than half of the required Down Payment.

Why it matters when buying a business: It is the first number to plan around, and a seller note can cut your cash to 5%.

Down Payment Guide

E

Earnout

An earnout is a promise to pay the seller more later if the business hits performance targets after the sale. SBA prohibits seller earnouts on acquisitions financed with a 7(a) loan. The reverse, a buyer rebate where the seller pays money back if the business underperforms, is allowed, and any rebate received must be applied to the SBA loan’s principal. A working capital true-up in the purchase agreement is not a rebate and can stay in the business.

Why it matters when buying a business: If your LOI has an earnout, it has to be restructured before an SBA lender can finance the deal.

SBA Earnouts Guide

EBITDA

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It measures a business’s operating profit before financing and accounting choices, and it is the standard earnings figure for larger acquisitions, often paired with a market multiple to set a price. EBITDA assumes the business pays a market salary to whoever runs it, which is the main difference from SDE. Lenders adjust EBITDA for supportable add-backs and then use it to test cash flow coverage.

Why it matters when buying a business: Larger deals are priced and underwritten on EBITDA, so know what yours really is.

What Is EBITDA

Express Line Of Credit

An SBA Express line of credit is a revolving line of up to $500,000 made by a lender with SBA Express authority. On acquisitions, buyers often close an Express line alongside the main 7(a) term loan so the business has working capital for payroll, inventory and seasonal swings from the first day. Lenders typically take a second lien on business assets for the line. The line does not count toward the total project cost when measuring the Down Payment.

Why it matters when buying a business: A line at closing means you are not relying on the seller’s cash to run the business.

SBA Express Loan

F

Franchise Disclosure Document (FDD)

The FDD is the disclosure document a franchisor must give buyers under FTC rules. It covers fees, obligations, litigation, financial statements, the number of locations opened and closed, and often financial performance information. For an SBA loan on a franchise, the lender reviews the franchise agreement and the documents the franchisor requires you to sign, and if the brand meets the FTC definition of a franchise, it must be listed on the SBA Franchise Directory.

Why it matters when buying a business: The FDD tells you and the lender what you are signing up for before you buy a franchise.

SBA Loans For Franchises

Franchise Resale

A franchise resale is the purchase of an existing franchise location from its current franchisee, with the franchisor’s approval. For SBA purposes it is a business acquisition: a 10% Down Payment on the total project cost, a business valuation, and cash flow from the location’s own history. Because the location has a track record, lenders usually treat it as lower risk than opening a new unit, which falls under start-up rules.

Why it matters when buying a business: Buying an open location lets the lender underwrite real numbers, not projections.

Buy A Franchise Resale

Full Standby

A note is on full standby when the lender holding it receives no payments of principal or interest for the entire term of the SBA loan. Interest can accrue and be paid after the SBA loan is repaid. A seller note on full standby, subordinated to the SBA lender, can count toward the buyer’s Down Payment, up to half of the requirement. A note on partial standby, such as 24 months, does not count toward the Down Payment and its payments are included when lenders test cash flow.

Why it matters when buying a business: Only full standby turns a seller note into Down Payment, so the wording in your note matters.

SBA Seller Notes

G

Guaranty Fee

The SBA guaranty fee, also called the upfront fee, is what the lender pays SBA to guarantee part of a 7(a) loan. It is based on the guaranteed portion of the loan, with percentages that depend on the loan size and are set by SBA each fiscal year. The lender can pass the fee to the borrower, and the borrower can pay it from loan proceeds. On larger acquisition loans it is often one of the biggest closing costs.

Why it matters when buying a business: The guaranty fee is usually financed in the loan, which adds to the total project cost.

SBA Closing Costs Breakdown

I

N

Non-Controlling Minority Investor

SBA defines a Non-controlling Minority Equity Investor as someone who owns less than 20% of the operating business and exerts no control over it. Their money can count toward the Down Payment as a limited source, together with any standby seller note capped at half of the requirement, but only if it is not subject to repayment or distributions before the SBA guaranty is released, other than tax distributions. Investors under 20% do not have to guarantee the loan.

Why it matters when buying a business: Keeping investors under 20% with no control keeps them off the guarantee.

Buying A Business With Investors

O

Owner Buyout

An Owner Buyout is a change of ownership among existing owners or employees, such as buying out a partner or redeeming a departing owner’s shares, without buying another company. At least one original owner stays and guarantees the loan. The Down Payment is 10% of the purchase price, and the lender may reduce or eliminate it if the business has enough liquidity and working capital. Buyers who have worked in the business less than 24 months can buy less than 50% and cannot become the largest owner.

Why it matters when buying a business: Owner Buyout rules can lower your Down Payment and skip the QoE requirement.

Buy Out A Business Partner

P

Pari Passu

Pari passu means "on equal footing." In SBA lending, it describes a structure where an SBA 7(a) loan and a conventional loan share the same collateral with equal lien priority, so a lender can finance an acquisition larger than the $5 million SBA limit. The 10% Down Payment is measured on the whole project, including the conventional loan, and not every SBA lender does these deals.

Why it matters when buying a business: Pari passu is how buyers finance acquisitions above $5 million with SBA terms on the largest piece.

SBA Pari Passu Loan

Personal Guarantee

A personal guarantee makes an individual personally responsible for repaying the loan if the business cannot. SBA requires an unlimited full guarantee from anyone who owns 20% or more of the borrower, counting ownership held through other entities, and spouses and minor children are counted together. If no one owns 20%, at least one owner must guarantee. Lenders can also require guarantees from others when needed for credit reasons.

Why it matters when buying a business: Ownership percentages in your deal structure decide who signs a guarantee.

Personal Guarantee Guide

Pre-Qualification Letter

A pre-qualification letter shows sellers and business brokers how much SBA financing a buyer is likely to qualify for, based on their cash, retirement funds, credit and deal structure. It is not a loan approval, which comes later from the lender after it reviews the business. Buyers include the letter with offers and LOIs to show they can close. GoSBA’s letter is free, and our team reviews each file before it goes out.

Why it matters when buying a business: Sellers choose buyers who can close, and a letter is the quickest way to show you can.

Get A Pre-Qualification Letter

Preferred Lender (PLP)

A Preferred Lender is an SBA lender with PLP authority, which lets it approve 7(a) loans under its own delegated authority. SBA does not review a PLP lender’s credit analysis before issuing a loan number, although it can review the file later. PLP lenders usually move faster because the decision sits with the lender. Most active acquisition lenders have PLP authority, which is one reason lender choice affects your timeline.

Why it matters when buying a business: Working with a lender that can approve in-house usually shortens the path to closing.

SBA Preferred Lenders

Q

Quality Of Earnings (QoE)

A Quality of Earnings report is an independent financial review that tests whether a business’s reported earnings are accurate and repeatable. Under SOP 50 10 8.1, SBA requires one for initial acquisitions and business expansions when the business purchase price, not counting real estate, is $3 million or more. It must be prepared for the lender’s benefit, include a cash proof against bank statements, and its adjusted earnings are used to test cash flow. A buyer’s own QoE can be used only after the lender’s vendor reviews it.

Why it matters when buying a business: On $3M+ deals, the QoE’s earnings, not the seller’s, decide whether the loan works.

Quality Of Earnings Guide

R

ROBS (Rollover As Business Start-Up)

ROBS lets a buyer use retirement savings for a business without taking a taxable distribution. The buyer forms a C corporation with a new 401(k) plan, rolls existing retirement funds into it, and the plan buys stock in the company. SBA allows ROBS as a Down Payment source if the lender follows its rules: the plan sponsor guarantees the loan regardless of ownership, plan documents and an IRS determination letter are collected, and loan proceeds cannot pay set-up costs. Not tax advice.

Why it matters when buying a business: ROBS can fund your Down Payment from retirement savings without an early withdrawal.

Buy A Business With Retirement Funds

S

Search Fund

A search fund is a model where an entrepreneur raises money from investors to search for, buy and run one business. In a traditional search fund, investors fund the search and then the equity for the acquisition. A self-funded searcher pays for the search personally and usually buys with an SBA loan, savings and a seller note. With an SBA loan, the searcher who owns 20% or more guarantees, and investor money follows SBA’s minority investor rules.

Why it matters when buying a business: Your search model decides how much equity you keep and how investor money counts.

Buying A Business With Investors

Seller Note

A seller note is a loan from the seller to the buyer for part of the purchase price. It shows lenders the seller believes in the business and lowers the cash or bank loan needed. On an SBA deal, a seller note on full standby can count toward up to half of the Down Payment. A seller note that is paid during the SBA loan’s term must fit the cash flow, and total debt, including that note, is capped at the business valuation. Seller debt can be refinanced after 36 months current.

Why it matters when buying a business: A well-structured seller note is the most common way buyers reduce their Down Payment to 5%.

Seller Notes Guide

Seller’s Discretionary Earnings (SDE)

SDE is the total financial benefit one full-time owner gets from a small business: pre-tax profit plus the owner’s salary and benefits, interest, depreciation, amortization, and one-time or discretionary expenses. It is the standard earnings measure for owner-operated businesses, usually those earning under about $1 million, and listings often price a business as a multiple of SDE. Lenders start from SDE but subtract a fair salary for whoever will run the business before testing cash flow.

Why it matters when buying a business: SDE drives most small business prices, so check it against tax returns before you offer.

SDE Guide

Special Purpose Property

A special purpose property is a limited-market property whose design, construction or layout restricts it to the use it was built for, such as a car wash, hotel or self-storage facility. When a business is bought with an owner-occupied special purpose property, SBA allows a single loan of up to 25 years if 85% or more of the total project cost is real estate and the property is integral to the business. A Quality of Earnings report is not required for these acquisitions.

Why it matters when buying a business: Real estate-heavy deals can get a 25-year term when they meet the special purpose test.

SBA Commercial Real Estate Loan

T

Total Project Cost

Total project cost is everything needed to complete the acquisition and get the business running, regardless of who pays for it: the purchase price, working capital, closing costs, fees and any real estate financed in the deal. Lines of credit and 504 loans are not included. SBA measures the Down Payment as a percentage of total project cost, not the purchase price alone, except for Owner Buyouts, where it is based on the purchase price.

Why it matters when buying a business: Your 10% is on the total project cost, so financed extras raise the cash you bring.

Down Payment Guide

W

Working Capital

Working capital is the cash a business needs to run day to day: payroll, inventory and bills while it waits for customers to pay. In an acquisition, the purchase agreement often sets how much working capital stays in the business, with a true-up after closing. An SBA acquisition loan can also include working capital as part of the project, or a line of credit can close alongside it. Lenders check that the business will have enough working capital for at least the next 12 months.

Why it matters when buying a business: Financing working capital at closing protects you from running short in your first months.

SBA Working Capital Loan

Quick Answers

What is the minimum Down Payment to buy a business with an SBA loan?

At least 10% of the total project cost for an initial acquisition, and the lender cannot reduce it. Up to half can come from a seller note on full standby, so the buyer’s own cash can be as little as 5%.

What is the difference between SDE and EBITDA?

SDE adds the owner’s salary and benefits back to profit and is used for smaller owner-run businesses. EBITDA assumes a market salary for management and is used for larger businesses. Lenders test cash flow after a fair salary for whoever runs the business.

What does full standby mean on a seller note?

The seller receives no payments of principal or interest for the entire term of the SBA loan. Only a full standby note can count toward the Down Payment.

When is a Quality of Earnings report required?

For initial acquisitions and business expansions when the business purchase price, not counting real estate, is $3 million or more, under SOP 50 10 8.1.

Who has to personally guarantee an SBA acquisition loan?

Anyone who owns 20% or more of the borrower, directly or through other entities, gives an unlimited personal guarantee.

Buyer Guides

Go deeper on the situation that matches yours.

Buy A Business With InvestorsSearch Funds, Independent Sponsors, Investor-Backed Buyers First-Time Business BuyerYour First Acquisition Franchise ResaleBuying An Existing Franchise Buy Out A Business PartnerOwner Buyout Guide Buy A Business With Retirement FundsROBS And 401(k) Down Payments Self-Funded SearchSelf-Funded Searchers

Also see: SBA Business Acquisition Loan · Buying A Business Guide · Closed Deals · For Business Brokers · Top SBA Lenders

Sources: SBA SOP 50 10 8.1 (eff. October 1, 2026), mainly Appendix 15 (7(a) Changes of Ownership), Appendix 3 (Definitions), Section A, Ch. 1 (Franchises), Ch. 2 (ROBS), Ch. 4 (Guaranty Fee), Ch. 5 (Guaranties), Section B, Ch. 1 and 2 (loan limits), Section C (504). Definitions are simplified; your lender applies the rules in effect for your application.

SBA Business Acquisition Glossary

All Terms

L

A

B

C

D

E

F

G

I

N

O

P

Q

R

S

T

W

Quick Answers

Buyer Guides

Thanks, we got it.

Ready To Buy A Business? Get Started.

Contact

SBA Loans

Company

Resources