How people pay for a business, and the cash you need up front

The short version

• Most buyers pay with a mix: their own cash, a loan and sometimes a note from the seller.
• With an SBA loan, you must put in at least 10 percent of the total cost of the purchase yourself. A seller note can cover part of that only under strict rules.
• Your down payment is not your only cost. Closing costs, working capital and a personal cushion all need cash too.
• Some buyers use retirement savings through a structure called ROBS. It is allowed, but it is complex and carries its own risks.
• Do not put your last dollar into the down payment. The business needs cash after closing, not only at it.

The usual mix

Your own cash. Savings, investments or proceeds from selling something else. Lenders want to see where it came from and how long you have had it.

A loan. Usually an SBA 7(a) loan or a conventional bank loan. It typically covers most of the price. Lesson 2.2 covers the options.

A seller note. The seller lets you pay part of the price over time. It lowers the cash you need at closing. Lesson 6.4 covers seller notes.

Investors or partners. Some buyers bring in family, friends or investors for part of the cash. Anyone who ends up owning 20 percent or more of the company will need to personally guarantee an SBA loan. Lesson 2.4 covers guarantees.

The SBA minimum

For a business purchase financed with an SBA loan, you must put in at least 10 percent of the total cost of the purchase from your own funds. Total cost means the price plus closing costs, working capital and other costs of getting started, apart from any line of credit. That is called the equity injection. For a buyer new to the business, it cannot be reduced. What you pay for due diligence, such as the valuation, counts toward it.

A note from the seller can count toward that 10 percent only if the seller receives no payments at all for the life of the SBA loan, and only for up to half of the required amount. Most buyers should plan on bringing the full 10 percent themselves.

Using retirement savings

Some buyers fund their share with retirement savings through a structure called ROBS, short for rollovers as business startups. In simple terms, you form a new company with its own retirement plan, roll your existing retirement savings into that plan and the plan buys shares in the company. The company then has the cash.

SBA rules allow this as part of the buyer's cash. It is complex. It must follow federal tax and retirement plan rules. It usually requires a specialist to set up and maintain. And it puts your retirement savings at risk in the business. The retirement plan's owner also signs a full personal guarantee on an SBA loan.

Ask your CPA and an attorney who knows these plans before you choose it.

What else needs cash

What	Why
Down payment	At least 10 percent of the total cost with an SBA loan, often more with a conventional loan
Closing costs	Lender fees, the SBA guarantee fee, your attorney and CPA, the valuation, any quality of earnings report and other third-party reports
Working capital	Cash the business needs to run after closing: payroll before customers pay, inventory and supplies
Your own cushion	Living expenses while your income from the business settles

Working capital can be financed

Working capital does not have to come from your pocket. It can be included in the acquisition loan as a lump sum, which raises your loan payment. Or it can be set up as a separate line of credit, alongside the main loan, that you draw on only when you need it. Ask your lender which fits the business.

Keep a reserve

Many sales of this size leave the money customers already owe with the seller. You take on payroll on day one without the receivables that were meant to cover it. A buyer who put every dollar into the down payment has nothing left for that gap.

The Estimate your cash at close tool adds up these costs for a purchase you are considering.