Acquisition lending terms vary dramatically by deal size. Founders who understand the capital stack before signing an LOI close faster, negotiate smarter, and avoid costly surprises.
Why the Buyer's Financing Structure Is Your Problem Too
Most founders spend months preparing their financials, cleaning up their cap table, and rehearsing their growth story. Very few spend any time understanding how the person on the other side of the table is actually paying for the business. That is a mistake.
The buyer's capital stack directly shapes the offer you receive, the terms attached to it, and the probability that the deal actually closes. A buyer using SBA financing behaves completely differently from one backed by private credit or a mezzanine fund. Their timelines are different. Their diligence requirements are different. Their tolerance for seller financing, earn-outs, and working-capital pegs is different. If you don't understand these distinctions going in, you're negotiating blind.
This article breaks down acquisition lending by deal size, explains what each structure means for you as a seller, and shows you where the real risk and leverage sit in each scenario.
How Acquisition Lending Works: The Basics
Acquisitions are almost never funded with all cash. Even strategic buyers with strong balance sheets often use some form of debt to preserve liquidity or improve returns on invested capital. For financial buyers like private equity groups or search fund operators, debt is fundamental to the model.
The debt used to fund a buyout is typically secured against the acquired company's assets and cash flows, not the buyer's personal balance sheet (though at smaller deal sizes, personal guarantees are standard). Lenders underwrite the deal based on the target company's EBITDA, recurring revenue, customer concentration, and debt-service coverage ratios.
That means your business's financial profile doesn't just determine valuation. It determines whether a lender will fund the deal at all, and on what terms. A company with lumpy revenue and one customer representing 40% of revenue will face a very different lending environment than one with diversified ARR and 90%+ gross retention.
Acquisition Debt Structures by Deal Size
The type of financing a buyer uses is largely dictated by transaction size. Here is how the capital stack typically looks across the size spectrum that matters most to technology and software founders.
SBA 7(a) Loans: $500K to $5M Enterprise Value
The Small Business Administration's 7(a) loan program is the dominant financing mechanism for small business acquisitions below $5M. These loans are originated by SBA-approved lenders but carry a government guarantee, which lets banks extend credit they otherwise wouldn't on a purely commercial basis.
The standard terms: 10-year repayment, interest rates currently running 11% to 12.5% (tied to prime plus a spread), and a required equity injection from the buyer of 10% to 20% of the purchase price. The buyer must provide a personal guarantee. The business's real estate and assets serve as collateral where available, and the lender will take a lien on everything it can.
For you as a seller, SBA deals carry specific implications. The process is slow, typically 60 to 90 days from LOI to close once the lender is engaged. The lender has its own diligence checklist, separate from the buyer's. And SBA rules often require the seller to stay out of the business entirely post-close, which can complicate transition arrangements. Seller financing is permitted in SBA deals, but the SBA generally requires it to be on standby for the first 24 months, meaning you won't see those payments until year three.
Conventional Bank Loans: $2M to $20M
Once you get above $5M in enterprise value, conventional bank financing becomes more common. These are commercial term loans underwritten on the target company's cash flows, typically structured over five to seven years with amortizing principal payments. Interest rates in the current environment run 9% to 11% depending on the bank, the business's credit profile, and the loan-to-value ratio.
Banks at this tier focus heavily on debt-service coverage. A lender wanting 1.25x DSCR on a $10M acquisition of a company generating $1.5M EBITDA will cap the loan at roughly $6M to $7M, depending on amortization schedule. The buyer has to fund the gap with equity. This is why valuations at the lower middle market are constrained by what lenders will finance, not just what buyers will pay.
Conventional bank deals also come with covenants. Minimum liquidity, maximum leverage ratios, restrictions on additional debt or distributions. These don't affect you directly post-close, but they affect how the buyer runs the business and can create pressure that flows into the purchase agreement in the form of working-capital pegs, escrow holdbacks, or tighter earn-out definitions.
Seller Financing: Any Deal Size
Seller financing is exactly what it sounds like: you extend a loan to the buyer, typically representing 10% to 30% of the purchase price, paid back over two to five years at 6% to 10% interest. It shows up in almost every deal size, but it's most common and most necessary in the sub-$10M range where institutional capital is harder to access.
Buyers like seller notes because they reduce the equity they need to bring to closing. Lenders like them because they signal seller conviction in the business's future performance. You should like them because they can close a valuation gap without giving away economics through an earn-out tied to metrics you can no longer control post-sale.
The risk is real though. If the buyer struggles post-close, your seller note is subordinated to the senior lender. You get paid last. Negotiate the interest rate and any security provisions carefully, and make sure your attorney structures the note with clear default triggers and remedies.
Mezzanine Debt: $5M to $50M
Mezzanine financing sits between senior debt and equity in the capital stack. It's expensive, typically 10% to 14% interest, often structured as interest-only with a bullet repayment at maturity. Mezzanine lenders also frequently take warrants or equity kickers, meaning they participate in the upside if the business performs well.
Mezzanine is used when a buyer wants to buy a business that senior lenders won't fully finance, or when the buyer wants to reduce the equity they put in. For the seller, a mezzanine-backed deal can actually mean better headline valuation because the buyer's cost of capital allows them to stretch on price. But it also adds a third party to the capital structure, another set of covenants, and another layer of complexity in the diligence process.
Unitranche and Private Credit: $10M to $100M+
Private credit has become a major force in middle-market M&A. Unitranche structures blend senior and junior debt into a single facility, typically at effective rates of 9% to 13% in the current environment, with more flexible covenants than traditional bank deals. Private credit funds like Golub Capital, Ares, or Blue Owl can move faster than banks and will finance deals that fall outside traditional bank credit boxes.
For deals above $10M in enterprise value, particularly software and SaaS businesses where recurring revenue is the primary asset, private credit has largely replaced the traditional bank loan. These lenders understand ARR-based underwriting, will lend against revenue multiples rather than just EBITDA, and are generally more comfortable with covenant-lite structures that give PE-backed buyers more operational flexibility.
As a seller, a PE-backed buyer using private credit is often your most sophisticated counterparty. They've done this before. Their processes are efficient. But their diligence is thorough, and they know exactly what they're looking for. Gaps in your revenue recognition, customer contracts, or financial reporting will surface quickly.
Earn-Outs: When Buyer and Seller Disagree on Value
Earn-outs deserve their own section because they're the most misunderstood and most contentious element of deal structure in technology M&A. An earn-out defers a portion of the purchase price, typically 10% to 30%, and conditions payment on the business hitting specified performance targets after closing.
Buyers use earn-outs to bridge valuation gaps, particularly when trailing revenue or EBITDA has been volatile, when the business is growing fast and the seller wants to be paid on future performance, or when the buyer has concerns about customer concentration or key-person risk. From the buyer's perspective, earn-outs reduce risk. From yours, they create it.
Here's the core problem. Once you close, you often have limited control over the decisions that affect whether you hit earn-out targets. The buyer controls hiring, pricing, sales strategy, and marketing spend. If they pull resources or pivot the product, your earn-out disappears through no fault of your own. This is why experienced M&A advisors push hard to negotiate earn-out definitions that are objective, simple, and based on gross revenue rather than EBITDA or net income, which are far easier for a buyer to manipulate through expense allocation.
Practical earn-out negotiating points worth fighting for:
- Define the metric precisely. Gross revenue is better than net revenue, which is better than EBITDA.
- Include a floor clause that pays a partial earn-out if the business hits 80% or 90% of target.
- Require the buyer to maintain minimum sales and marketing spend levels during the earn-out period.
- Include an acceleration clause: if the buyer sells the business before the earn-out period ends, the full earn-out becomes due immediately.
- Limit the earn-out period to 12 to 24 months. Anything longer becomes nearly impossible to enforce and is practically worthless.
- Get monthly financial reporting rights with audit provisions built into the purchase agreement.
What Lenders Actually Look At During Diligence
This is where many deals slow down or die. The buyer is enthusiastic, the LOI is signed, and then the lender's diligence checklist arrives. It's 80 items long. Your bookkeeper has never seen anything like it. Three weeks pass. The buyer gets nervous. You get nervous.
Lenders underwriting an acquisition want to answer one question: will this business generate enough cash to service the debt after the deal closes? Everything in their checklist flows from that. They're looking at normalized EBITDA (your reported EBITDA adjusted for one-time expenses, owner compensation above market, and non-recurring items), revenue quality (recurring vs. one-time, contract terms, renewal rates), customer concentration (most lenders get uncomfortable if one customer represents more than 15% to 20% of revenue), and management depth (can this business survive without the founder?).
For SaaS and software businesses specifically, lenders increasingly focus on net revenue retention, churn by cohort, and the ratio of ARR to total revenue. A business with 110% NRR and 85% ARR concentration closes in a different risk category than one with 90% NRR and high services revenue.
The practical advice: prepare for lender diligence before you go to market. Have three years of clean, accountant-prepared financials. Have a clear addback schedule with documentation for every adjustment. Know your customer concentration numbers cold. These aren't just nice-to-haves. They are the difference between a deal that closes in 60 days and one that drags for five months.
How Deal Size Affects Valuation Multiples and Structure
There's a direct relationship between deal size and the valuation multiple you can command. It's not just about market dynamics. It's about the financing environment at each tier.
At the $1M to $5M enterprise value range, most buyers are SBA-constrained. The math of a 10-year SBA loan at 12% interest with 1.25x DSCR requirements puts a ceiling on what any rational buyer will pay. Valuations in this range typically run 3x to 5x EBITDA for profitable businesses, occasionally 4x to 6x for high-growth SaaS with strong retention.
At $10M to $30M, private equity enters the picture in earnest. Valuations step up to 5x to 9x EBITDA, or 3x to 8x ARR for SaaS businesses with greater than 20% growth. The presence of multiple financial buyers competing for the same asset is the primary driver of multiple expansion at this tier.
Above $30M, institutional private equity and strategic buyers dominate. Multiples for high-quality software businesses can reach 10x to 15x EBITDA or 6x to 12x ARR. At this level, the financing environment is favorable, competition is intense, and a well-run process managed by an experienced M&A advisor can generate a material difference in outcome.
The jump from the sub-$5M tier to the $10M-plus tier is often more about deal structure than business quality. A company generating $800K EBITDA will typically sell at a lower multiple with worse terms than an otherwise identical business generating $2M EBITDA. This is why many advisors push founders to wait until they cross certain EBITDA thresholds before running a formal sale process.
Working-Capital Pegs, Escrows, and Other Terms That Move the Real Price
The headline purchase price in an LOI is not what you'll walk away with. Several structural elements in the definitive purchase agreement can reduce your actual proceeds significantly, and founders routinely underestimate their impact.
The working-capital peg is one of the most commonly negotiated and most commonly misunderstood provisions. The buyer sets a "target" level of working capital that must be delivered at closing. If actual working capital comes in below that target, the purchase price is reduced dollar for dollar. If it comes in above, you get the difference. Buyers often set the peg at the high end of the trailing 12-month average. If you've been running lean, you could face a meaningful adjustment at closing.
Escrow holdbacks are standard. Typically 5% to 10% of the purchase price is held in escrow for 12 to 18 months post-close as security for indemnification claims. If a customer dispute, tax liability, or representation breach surfaces, the buyer draws against escrow first. In clean deals, the escrow is released in full. But it's liquidity you don't control for a year or more.
Rollover equity is common in PE deals. The buyer asks you to reinvest 10% to 30% of your proceeds into equity in the new entity. This aligns incentives and signals confidence in the business, but it also means your exit isn't fully liquid at closing. The rollover equity typically has a 3 to 7 year time horizon before the PE firm's next exit event gives you liquidity. In a good outcome, rollover equity can meaningfully increase your total proceeds. In a bad one, it's worth very little.
Frequently Asked Questions
How does the buyer's financing affect my closing timeline?
Significantly. SBA-financed deals typically take 60 to 90 days from LOI to close because the government-backed underwriting process adds layers of review. Conventional bank deals run 45 to 75 days. PE deals backed by private credit can close in 30 to 45 days if diligence is clean. The more complex the capital stack, the more parties whose approval is required, and the longer the timeline. A well-prepared seller who has financials, customer data, and key contracts organized before going to market can compress timelines at every tier.
Should I be worried if a buyer wants to use seller financing as part of the deal?
Not necessarily, but don't treat it as free money. Seller notes are subordinated to senior debt, which means if the business struggles post-close, you're last in line for payment. Negotiate the interest rate (aim for 7% to 9%), push for a security interest in company assets where possible, and include clear default triggers. A seller note of 10% to 15% of purchase price at a reasonable interest rate is normal and often helps deals close. A note representing 30% or more of the deal is a red flag worth scrutinizing.
What is an earn-out and when is it reasonable to accept one?
An earn-out ties a portion of your purchase price to post-closing performance. They're most reasonable when your business has had a surge of recent growth that the buyer is skeptical will continue, or when you genuinely believe in the upside and want to participate in it. They're least reasonable when the buyer will control all the inputs that determine whether you hit the target. If you accept an earn-out, negotiate hard on the metric definition, the earn-out period (shorter is better), and protective provisions like minimum spend commitments and acceleration on sale.
How do I know if my business is too small to run a competitive M&A process?
The honest answer is that businesses generating less than $500K in EBITDA or $1M in ARR will struggle to attract multiple serious institutional buyers. You may still get a good outcome, but it's likely to be driven by one or two buyers rather than a competitive auction. Once you cross $1M to $1.5M in EBITDA or $3M to $5M in ARR with strong retention, the buyer universe expands meaningfully. FIH works with technology companies across this range and can give you a direct read on buyer appetite based on your specific metrics and business profile.
What is a working-capital peg and how does it affect my proceeds?
A working-capital peg is a contractual mechanism that adjusts the purchase price up or down based on the difference between actual working capital at closing and a pre-agreed target. If you deliver less working capital than the target, the purchase price is reduced dollar for dollar. Buyers typically set the target at a trailing average, so if your business is seasonal or you've been pulling cash out aggressively before the sale, you could face a significant downward adjustment. Review the peg methodology carefully during LOI negotiations, before you've agreed to an exclusivity period.
Does it matter whether my buyer is a strategic or a financial buyer when it comes to financing?
Yes, materially. Strategic buyers often use their own balance sheet or corporate credit facilities to fund acquisitions, which means no third-party lender, faster diligence, and fewer closing conditions. Financial buyers, private equity in particular, rely on debt financing, which introduces lender timelines, covenants, and DSCR constraints into the process. Strategics may also be willing to pay a premium for synergies that a financial buyer can't justify. That said, financial buyers often move faster, offer cleaner purchase agreements, and are more predictable in how they structure deals.
Key Takeaways for Founders Considering a Sale
The buyer's financing structure isn't a background detail. It's a central determinant of your deal's price, timeline, and certainty. Understand which buyers operate at your deal size, what their capital stacks look like, and where the friction points in their financing process tend to emerge. A founder who walks into an LOI negotiation knowing how SBA underwriting works, what a working-capital peg does, and how earn-outs typically get structured is in a fundamentally different negotiating position than one who doesn't.
The specifics matter. Know your EBITDA normalization story cold. Understand your NRR and customer concentration before a lender asks. Have your three years of financials ready and reconcilable. These aren't just things your advisor should know. You should know them too.
If you're thinking about a sale in the next one to three years and want to understand where your business fits in today's buyer and financing environment, FIH runs confidential off-market processes for technology and software founders with a 15,000-plus buyer network and a success-based fee structure. Start with a no-obligation valuation conversation to understand what your business is actually worth and what terms to expect when you go to market.