Business Acquisition Answers
Expert answers to the most common questions about buying, valuing, and financing small business acquisitions.
Buying a Business
How much does it cost to buy a small business?
Small businesses typically sell for 2–4x their annual Seller's Discretionary Earnings (SDE), meaning a business earning $200K in SDE would sell for $400K–$800K. Total acquisition costs include the purchase price plus working capital, professional fees, and closing costs — usually 5–15% above the purchase price.
How do I find small businesses for sale?
The best sources for finding businesses for sale are online marketplaces (BizBuySell, BusinessBroker.net, BizQuest), business brokers, direct outreach to owners, and deal sourcing platforms like SearchStreet. Most quality deals come through broker relationships and proprietary sourcing — only 20–30% of businesses for sale are publicly listed.
What is Entrepreneurship Through Acquisition (ETA)?
Entrepreneurship Through Acquisition (ETA) is the strategy of buying an existing business rather than starting one from scratch. Made popular by Harvard Business School and Stanford's search fund model, ETA allows entrepreneurs to skip the startup phase and immediately operate a profitable business. Common ETA paths include self-funded search, traditional search funds, and independent sponsorship.
What is an independent sponsor in private equity?
An independent sponsor (also called a fundless sponsor) is a private equity professional who sources and manages acquisitions without a committed pool of capital. Instead of raising a traditional PE fund, independent sponsors find deals first, then raise capital from investors on a deal-by-deal basis. This model has grown rapidly, with independent sponsors now accounting for 30%+ of lower middle market PE deals.
How does a search fund work?
A search fund is a two-phase investment vehicle where an entrepreneur raises initial capital ($400K–$600K) from investors to fund a 2-year search for a business to acquire. Once a target is identified, the same investors provide acquisition capital. The searcher typically receives 20–30% equity in the acquired business. Search funds have a strong track record — Stanford reports 30%+ average IRR to investors.
Valuation
How do you value a small business for acquisition?
Small businesses are most commonly valued using the SDE multiple method: calculate the owner's total annual cash benefit (SDE), then multiply by an industry-standard multiple (typically 2–4x). Larger businesses ($5M+ revenue) use EBITDA multiples instead. A blended approach using revenue, SDE, and EBITDA multiples gives the most accurate range.
What is SDE (Seller's Discretionary Earnings)?
SDE (Seller's Discretionary Earnings) is the total annual financial benefit a single owner-operator receives from a business. It equals net income plus the owner's salary, benefits, and perks, plus any discretionary or one-time expenses. SDE is the standard earnings metric used to value small businesses (under $5M revenue) for sale.
What are typical business valuation multiples by industry?
Valuation multiples vary widely by industry. SaaS businesses trade at 4–8x EBITDA, home services (HVAC, plumbing) at 3–5x SDE, dental practices at 5–7x SDE, insurance agencies at 2–3x revenue, and restaurants at 2–3.5x SDE. The biggest drivers of multiple variation within an industry are recurring revenue percentage, owner dependency, and growth rate.
Financing
Can you buy a business with an SBA loan?
Yes — the SBA 7(a) loan is the most popular way to finance a small business acquisition. SBA loans cover up to 90% of the purchase price (10% buyer down payment), offer 10-year terms at competitive rates, and are available for most businesses with 2+ years of operating history and sufficient cash flow to cover debt service at 1.25x or higher.
What is seller financing when buying a business?
Seller financing (also called a seller note or seller carry) is when the business seller lends the buyer a portion of the purchase price, to be repaid over time with interest. Typically 10–30% of the purchase price, seller notes are often structured at 5–7% interest with 3–7 year terms. In SBA deals, seller notes on full standby (no payments for 2 years) can count toward the buyer's equity injection.
Can you buy a business with no money down?
While truly zero-down business acquisitions are rare, you can acquire a business with very little out-of-pocket capital by combining SBA 7(a) financing (90% LTV) with a full-standby seller note (counting as your equity). In some cases, the effective out-of-pocket can be under 5% of the purchase price. Other creative approaches include earn-in agreements, search funds, and leveraged ESOP transactions.
Due Diligence
What is due diligence when buying a business?
Due diligence is the investigation period after signing a Letter of Intent (LOI) where the buyer verifies everything the seller has represented about the business. It typically covers financials (tax returns, P&Ls, QoE report), legal (contracts, leases, litigation), operations (employees, customers, vendors), and regulatory compliance. Due diligence usually takes 60–90 days.
What is a Quality of Earnings (QoE) report?
A Quality of Earnings (QoE) report is an independent financial analysis performed by a CPA firm during business acquisition due diligence. It verifies the seller's reported earnings, identifies non-recurring items, normalizes working capital, and produces an adjusted EBITDA/SDE figure that lenders use for financing decisions. QoE reports cost $15K–$40K and take 3–4 weeks.
Acquisition Process
How long does it take to buy a business?
The typical small business acquisition takes 6–12 months from initial search to closing. The search phase averages 3–6 months, LOI to due diligence takes 60–90 days, and SBA financing adds 45–75 days. Total elapsed time depends on deal complexity, financing type, and how prepared the buyer is.
What is a Letter of Intent (LOI) for buying a business?
A Letter of Intent (LOI) is a non-binding document that outlines the key terms of a proposed business acquisition — including purchase price, deal structure, due diligence timeline, and exclusivity period. The LOI comes after initial analysis and before formal due diligence. It typically grants the buyer 60–90 days of exclusivity to complete due diligence.
How do you structure a small business acquisition?
Most small business acquisitions are structured as asset purchases (not stock purchases) with a combination of SBA 7(a) financing (70–80%), seller note (10–20%), and buyer equity (10–20%). The purchase price is allocated across goodwill, equipment, inventory, non-compete, and training — each with different tax treatment. Asset deals protect buyers from unknown liabilities.
How do you negotiate when buying a business?
The key to negotiating a business acquisition is understanding the seller's motivations (retirement timeline, legacy concerns, tax situation) and focusing on deal structure rather than just price. You have more leverage on terms than price — seller financing, earn-outs, transition periods, and working capital provisions can dramatically improve your economics without lowering the headline price.
What is the difference between an asset purchase and a stock purchase?
In an asset purchase, the buyer acquires specific business assets (equipment, customer list, brand, contracts) without buying the legal entity. In a stock purchase, the buyer acquires ownership of the entire company, including all assets AND all liabilities. Asset purchases are preferred by buyers (liability protection, tax benefits), while stock purchases are sometimes preferred by sellers (simpler, capital gains treatment). 95%+ of small business acquisitions are asset purchases.
What happens after you buy a business?
The first 100 days after closing a business acquisition are critical. Priorities include: seller transition and knowledge transfer (30–90 days), meeting all employees and key customers, understanding financials at a granular level, identifying quick-win improvements, and establishing your operating cadence. The golden rule: change nothing for the first 90 days unless it's urgent.
How do you sell a small business?
Selling a small business typically takes 6–12 months and involves five phases: preparation (clean financials, increase value), valuation (establish asking price using SDE/EBITDA multiples), marketing (list with a broker or marketplace), negotiation (LOI, due diligence), and closing (purchase agreement, transition). Working with a business broker is recommended — they charge 8–12% commission but manage the entire process.