Business Purchase Budget with Available Capital

May 23, 2024

by a searcher from University of Wisconsin - Whitewater in Chicago, IL, USA

Hello everyone,

I'm a self-funded searcher exploring my capacity to acquire a business. While I understand that underwriting largely depends on the specifics of the business in question, I’m trying to get a rough idea of what size business my capital can support.

Here’s a breakdown of my resources:

- $100,000 in cash designated for a down payment
- $100,000 in additional cash and investment accounts
- $150,000 in home equity

Some additional details about me:

- 30 years old with an 800 credit score
- Annual income of $160,000 (not including my spouse’s income)
- Professional background in financial services and middle management in Big 4 consulting

I'm planning to use the $100,000 for the down payment and am assuming a 10% seller note. What scale of business can I realistically afford?

I've received an “estimate” from a lender that caps me around 600k business price with 20% down and requires additional 10% in reserve.

Reply by an intermediary
in San Francisco, CA, USA

Assuming 1) your $160k+ in income remains after you acquire the business, 2) the business itself has consistent cash flows, and 3) you're talking about an SBA loan, $600k seems low.

Like you said, the financials of the business are much more important than your personal finances to lenders. Given your credit score the main determinant of the size of loan is likely going to be the purchase price and how much the seller is willing to offer as a sellers note.

As an example, let's say you find a seller who has a business valued at $5M with $1.5M in EBITDA and is willing to offer a 20% sellers note. The note plus your $100k down payment would put you at 22% equity. A SBA loan at 10% over 10 years for the remaining $3.9M will put you at a DSCR of 2.4, well above what lenders require.

But if the same business wants to sell for $5M but is only doing $1M in EBITDA and is only open to a 10% note, your DSCR is going to be 1.4 which cuts it pretty close to the minimum, especially if the business is perceived as risky.

If you want to learn more, we scraped all the data on SBA loans since 2020 and put it in a database to make it easy for searchers to find lenders. Check it out here: https://godealwise.com/beacon

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question. You have provided a lot of details here but still not everything we would need to assess such an opportunity. But if I were talking conservative numbers based on the information provided and assuming an SBA loan structure, and also assuming you only wanted to put $100,000 down, having that be a 10% down payment would allow you to do an acquisition of $1 million. If you have a seller note on full standby for two years and we can get a deal done with only 5% down, you could do an acquisition of $2 million. That of course assumes the business cash flow supports a deal with less cash down. If you plan to raise additional equity or put more cash down you could certainly do a higher loan. We have gotten even larger deals done for individuals with less of a net worth than you have so long as they could come up with the required down payment. It appears to me whomever gave you the initial quote on what they could do was requiring way more equity than would typically be required.

Happy to get on a call to discuss options and work to get you pre-approved. You can reach me here or directly at redacted Good luck.

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