Do you want to be knowledgeable and prepared when you decide to exit your own business? Having an in-depth look at SBA will come in handy when that day arises. Today’s guest is Douglas Adams, the principal and president of Emerson Capital Corp, which provides financial solutions in business acquisition loans. In this episode, Douglas discusses with Domenic Rinaldi the qualification, costs, and debt structure of SBA. If you want to have great intel so you can better understand the assumptions that banks and buyers make with SBA, then this episode is for you.

Do you know the components of an SBA acquisition loan? Do you understand how a lender will evaluate your ability to repay a loan?

Download our free resource that goes along with this episode, The Anatomy of a SBA Loan, here:

Listen to the podcast here:

Subscribe Now:

Subscribe to K2 Adviser on YouTube
K2 Adviser on Apple iTunes
K2 Adviser on Google Play
K2 Adviser on Stitcher App
K2 Adviser on Spotify

Douglas Adams: What You Need To Know About Small Business Acquisition Loans

We have a great episode coming your way. I’m being joined by Doug Adams again. He is an expert in SBA acquisition loans. We break down the anatomy of a $3 million deal that qualifies for an SBA loan. We also take it a step further by comparing a typical $3 million deal versus the same deal with the benefits of the CARES Act. Doug and I go into detail about the costs associated with this type of deal, the annual debt structure, and what is left over after debt service for the new owner in the way of a salary or distributions. If you’re an owner of a business, we can provide you with some great intel, so you can better understand the assumptions that banks and buyers make will only help you be more knowledgeable when the day arrives for you to exit your own business.

I enjoyed digging into this topic with Doug. There’s a lot of great information here to help you be better prepared for your own transaction. If you would like a hard copy of this SBA loan comparison, you can download it on our website at It will be under the Resources tab. Being prepared is critical to ensuring that you maximize returns and minimize risks. Thank you for being here and I hope you enjoy this show.

Doug, welcome back to the show.

Thank you. I’m happy to be here.

MAU 97 | Small Business Acquisition Loan

Small Business Acquisition Loan: One thing that gets the banks comfortable anyway, besides earn-out, is a seller note.


Thank you so much for carving out time. Your episodes have done so well. It has highlighted for us the appetite that people have for understanding financing and what goes into it. I’m excited to get into our topic, which is we’re going to give people an example of a $3 million deal and how that deal would get financed and the components of it. We’re going to throw a little twist in there. We’re going to do a comparison of an SBA loan with the benefits of the latest CARES Act compared to the same deal without the benefits of a CARES Act. I’m excited to go through that. On the surface, when you and I did this, it didn’t seem like a big deal, but when you get to the bottom line over the course of a ten-year loan, it’s a big deal.

Before we dive in there, let’s talk about the current market. We talked about this at the end of 2020 in an episode that you and I did where we had anticipated businesses were going to be coming to market, but with softer financials. People or companies that had been impacted by COVID and they want to get to the market in 2021. Sure enough, we see that. We see the companies lost traction in 2020, but many are gaining that traction back. We had been telling people that banks would still lend as long as you show that you’d got a trend that’s coming back to pre-pandemic levels. You and I in our firm are dealing with that every day. We see many companies with financials that have been significantly impacted, but they’re showing some recovery. The bank is true to its word. They are looking at these deals and financing them.

As we’ve seen, there are plenty of or a number of businesses that are still thriving and have thrived throughout the pandemic, depending on the industry and their business model. As you said, there are numerous ones that have suffered, especially during the lockdown period from March 2020 through May or June 2020. As the banks analyzed these businesses and go into the cashflow, they’re all about having to prove up the debt coverage for 2020.

If there is such a downward amount of revenue and cashflow for 3, 4, or 5 months of the year, that’s going to make that tough. The banks have proven up that they will look past that if, as you said, the trends are back to where the revenue was pre-pandemic or at least enough to establish enough cashflow to cover the debt. When we talk about the trend and looking at a trend, it can’t be a month or two. It’s got to be 4, 5, or 6 months so that you can readily see that it’s back on track. That shows flexibility and the banks are willing to take that into account and go ahead and move forward with the deals. It’s worked out all right so far.

Go ahead and move forward with the deals. Share on X

That’s great news for buyers who need to get access to lending in order to buy a business. It’s great news for sellers so that they can walk away with a good majority of the transaction in cash at the closing table. That doesn’t mean that there are not still some risks and that the deal structures might be changing. You and I had talked about this. Buyers are going to be more cautious. They’re going to have to do more diligence.

They’re going to have to be comfortable that the business is coming back, and the deal structure might change in the sense that if you’ve got a $3 million deal, pre-pandemic, the seller might’ve walked away with 90% of that cash at closing. Now maybe there’s an earn-out component that’s layered in there to make sure that the business does rebound in that this isn’t a short blip on the radar. We know that the SBA will deal with that deal structure, as long as the earn-out can only go down and not up.

We’ve talked about this many times. The one thing that gets the banks a little more comfortable besides an earn-out is a seller note. You’ve got the 10% down of the usual structure and then maybe a 10% seller note. That’s maybe 90% of the deal structure that we are seeing. The earn-outs and if you want to get into that a little bit or the negative earn-out within the auspices of a seller note to accomplish some triggers that will allow you to pay less to the seller under the terms of the seller note. It’s a negative possibility in terms of payment to the seller if the triggers aren’t met.

It can’t be more than the purchase price allows for in a regular earn-out situation. One of the other things that the banks are looking at in this post or the existing COVID environment is, in addition, to try to understand the trends, they’re going to ask for the monthly P&Ls for 2020 and going into 2021. Also, the comparative monthly P&L is for 2019 so that they can assess, especially with seasonal businesses, “Is this where it’s back to where it needs to be?”

It’s a good point because business owners need to understand that they can’t just produce annual and quarterly financials anymore. It’s going to be imperative that they close out every month and that they produce monthly statements that are accurate, which means you’ve got to get the books reconciled and months closed, which is normal in any business. A lot of people don’t do that but that will be a requirement going forward. That’s a great point. The good news is banks have the appetite to lend. There are plenty of buyers in the marketplace. If you’ve got a business that’s rebounding, there’s a good chance we can get a loan. It may take some different deal structures, but it’s not like lending and shut down. You want to sell and buy.

I would also mention one other thing that we haven’t talked about in terms of these CARES Act benefits and partially because I’m not sure it makes a ton of difference, or at least the bankers are not saying it does, but the government, the SBA guarantees the banks, a portion of their exposure on these deals. That’s one of the reasons they do absorb all this goodwill and it’s not about collateral. It’s about cashflow. Historically, that percentage for these acquisition deals is 75%. The banks are getting a government guarantee for 75% of exposure. The CARES Act has raised that up to 90%. You say to yourself, “They got a 90% guarantee. They should lend every single deal.” Banks being the conservative bunch that they are there, they know it’s there, but it’s not incredibly changing their approach.

If they do bad loans, they’re going to get audited and they could lose their preferred status. Just because there’s a 90% guarantee, they can’t go out and do bad loans. They still have a fiduciary to the SBA to do quality loans.

You would hope that encourages them at least a little bit more to do a deal that they might be on the fence about, but we don’t know that.

I don’t think we would have the CARES Act too in some of the programs that are out there that we’re going to talk about here if the government didn’t want to see lending happen. Banks are not going to get too far out on a limb. They have to see some good fundamentals. Let’s dive into this example that I referenced in the opening where we’re going to layout a typical $3 million deal. When I say $3 million deal, $3 million of the purchase price and we’re going to do a side-by-side comparison of what that deal would look like before the CARES Act benefits and now with the CARES Act benefits.

Those benefits are going to run out at the end of September 2021. Acquiring a business before then is imperative if you’re going to go the SBA route. SBA works if you’re going to acquire a business and the loan amount is going to be $5 million or less. There could be some scenarios where you could go higher than that, but generally speaking, it’s $5 million or less. Let me tell the readers that this comparison is going to be up on our website, and you can download it from our website at It will be in the Resources tab. You can get to that tab and download this side-by-side comparison and see what Doug and I are talking about. For purposes of the discussion, we’ve looked at a $3 million deal. We’ve assumed that $3 million deal had cashflow and adjusted EBITDA of about $750,000 or otherwise referred to as seller’s discretionary earnings.

We put a four multiple on this deal. It could be $3.5 million or $4.5 million. It could be any multiple, but we took a middle-of-the-road example here. It’s a $3 million purchase price, $750,000 of adjusted EBITDA and then we’ll go through with the other assumptions and show you exactly what this deal would look like. Doug, why don’t you take over from there? Why don’t we talk about what this deal would look like before the CARES Act and then with the CARES Act changes and what that means to a buyer?

It’s a $3 million purchase price example. In the SBA world, you’ve got to meet the criteria. There are certain rules and requirements. One of them being that the buyer needs to put into the deal, in equity or down payment, 10% of the project cost. The project cost is historically defined as the purchase price, the bank’s closing costs and the SBA fee. Without the CARES Act benefits, you figure out what the SBA fee is dependent upon the loan amount and you put it into an SBA calculator. There’s a way to get at that dollar amount, but it’s strange. The easiest way is to put it in the calculator. It’s about 2.25% up to 3.5% times the loan amount, depending on how high the loan is. In this case, we know that the SBA fee is $66,000. The estimated bank closing costs are $10,000.

Why does the SBA charge a fee, to begin with? What’s the rationale behind that SBA fee because $66,000, plus the SBA closing cost of $10,000, that’s a lot of money? That’s $76,000 on a $3 million purchase price. What are those fees intended to cover?

The $10,000 is the bank’s closing costs. That’s not the SBA. That goes to title searches, filing fees, attorney’s fees, valuations, and all the things that the bank does to close a deal. The $66,000 is the SBA fee and the SBA fee is the revenue to run the SBA organization. They get funding from the government, but they also have the contingent liabilities for every single deal that is booked. If God forbid, there’s a deal that goes bad, they’re going to have to pay these monies out and get the bank whole to the tune of 75% or 90% nowadays.

They’ve got staff, budgets and all these things to run this organization. That’s the price you paid to get that guaranteed benefit, which translates to all the benefits of the SBA deals, which are longer-term deals, minimum down payments, low-interest rates, no pre-payment penalty, not being about collateral and absorbing all the goodwill. All of these things are designed to enhance and encourage the lending but you’ve got a price to pay for it and that is the SBA fee.

You highlight all of the tremendous benefits of the SBA program because if you were to go for a conventional loan, the interest rates could easily be double what an SBA loan is. The payback period is typically half, 5 years or sometimes even 3 years. The down payment requirements, the equity injection from a buyer, could be much higher. It’s a lot of money, but you do get a lot of benefit at the end of the day in terms of lower rates and longer amortizations.

MAU 97 | Small Business Acquisition Loan

Small Business Acquisition Loan: Most banks are willing to add a line of credit to the extent that this particular business needs to make sure that there’s enough working capital in the structure.


In our example, you’ve got the $3 million purchase price. The SBA fee at $66,000, estimated closing costs at $10,000. It gives you a project cost of $3,076,000. As the buyer comes in, you hit the minimum equity injection and there are some alternatives, but if you go down a rabbit hole when you talk about these various different things, but we’ll keep it simple. Ten percent of that is the required buyer’s injection or $307,600. Typically, as we talked about when we opened in our example here and the majority of the deals will have a seller note involved, we’re making the assumption that there’s a seller note for 10% of the purchase price as well. In this case, in the $3 million purchase price, the seller note is $300,000.

We see that in almost every single deal, at least 10%. The reasons behind that are the banks like to see that the seller has some ongoing involvement and skin in the game and interest in making sure the buyer is successful. Buyers like it because they want the same thing. They want to know that the seller has some ongoing interest in making sure that they’re successful. It’s rare if ever that we don’t see some form of a seller note.

I will also add that when you have a structure like this, the bank is then lending 80% of the purchase price instead of 90% of the purchase price. It also helps with something we haven’t talked about much and that is the valuation that is done during the closing process of every SBA loan. The rules are that the bank is not supposed to lend more than the valuation amount. If that loan is 80% of the purchase price, then the chances are you’re going to meet those criteria much more easily.

If you subtract the equity injection and the seller’s note, that leaves the bank loan, in our example, $2,468,400. For the business only, since we’re not talking about a transaction with real estate, you’re going to get a 10-year term or 120 months. The rate, depending on the size and the strength of the deal will usually be between 5.25% to 6% at this purchase price to this loan amount. We’re making the assumption that it’s 5.5%.

The general rule of thumb here is that you’re looking at a prime plus 2.25% and 2.5%.

You are up to 2% and 3.25%. For a $3 million deal, 5.5% is a reasonable rate. That would be the expectation. With those variables, then your monthly payment is $26,789 or $321,464 a year. To continue on with figuring out the overall debt services for the buyer, then we’ve got the seller note. We have to make assumptions. Here we’re making an assumption that the seller note is a five-year term, 60 months, the rate is 5%, and there’s no rule other than it has to be reasonable. It’s a negotiated rate between the buyers. Those variables come up with a monthly payment of $5,661 or $67,936 a year. The other component that we’re adding into the debt structure here. This is again an assumption and it depends on the nature of a given business, is a line of credit.

Not every bank has the ability to do lines of credit or express lines of credit, the SBA express lines of credit, but most of them do. They’re usually ready and willing to add a line of credit to the extent that this particular business needs because they want to make sure that there’s enough working capital in the structure. They often will do this. It’ll add to the SBA exposure. The CARES Act has raised up the highest amount of the line of credit until September 2020 up to $1 million, after which it’ll drop back down to $500,000. In this case, we’re assuming a $100,000 line of credit. It depends on the businesses, the average accounts receivables, and things like that.

If I would put a $100,000 line of credit and for their conservative analysis purposes, the bank would assume that it’s fully borrowed and how much the interest is since its interest-only typically for the first three years and what that effect is on the debt service. Here $100,000 at 5.5% is $5,500 in interest per year. If you add up the SBA loan payments, the seller note payments and that line of credit interest payments for the year, you’re getting $394,900. That’s your debt load. That’s your debt service per year on the transaction.

I want to make a comment about lines of credit. Most of the transactions that we see in those sub $5 million range, typically their asset transactions and the sellers are keeping their balance sheet, meaning they’re keeping their accounts receivables, accounts payable, and they’re curing all the debt at the time of closing. The buyer is typically walking into a clean balance sheet, but that means they need money to keep paying payroll and other expenses until they start to get the accounts receivables coming in after the closing date.

Working lines of capital are important. The program of adding flexibility to up to $1 million of working capital is tremendous. I caution all buyers that if you are doing an asset transaction and taking over a clean balance sheet, either you need to have a lot of your own equity available or you need to avail yourself of these lines of credit. The last thing you want to do is not be able to meet your obligations until you start getting the cashflow coming in after the closing of the business. You left off with a total debt service payment are being $394,900 in this example against the business that typically is bringing in $750,000 of cashflow.

In our example, we use the $750,000 for each year, rarely is it exactly that. The banks, in their assessment and analysis, will pull out what they perceive as the household needs for the buyer. This is a calculation they will make depending upon the buyer’s personal debt, mortgage payments, home equity line, car payments, credit card debt and dependents in the household. They’ll come up with their formula that will determine how much they want to pull out or how much the buyer feels that he used to pull out in a salary draw. In our assumption here, we’re using $100,000 as an assumed buyer’s drop. You take that off of the available cashflow and this is absent outside continuing income that a buyer might have and that can change the equation, but for our purposes, we’ll keep it simple. That will leave you $650,000 for the cashflow available for debt service coverage.

I want to be very clear here. This is a mathematical assumption that the bank is making. This is not money that’s being drawn down. You’re not being forced to take $100,000 out, but it’s for purposes of coming up with debt service coverage. You could wind up taking $75,000 or $150,000. It doesn’t matter, but this is a Mathematical assumption the bank needs to make in order to know that the deal covers their debt service.

When the bank is looking at a real deal, they’re going to have that buyer’s personal financial statement, his credit report. They’re going to be able to understand what his obligations are and adjust that accordingly. We’re making the assumptions here. You’ll compare the $650,000 with the debt service of $394, and you get a healthy coverage of a 1.65%. That’s a strong deal. That’s a sufficient cashflow. That deal, all other things being good or equal, will get approved by the bank.

To bring people through the calculation, how did you get to one 1.65% and what is the typical coverage that most banks are looking for?

The 1.65% is purely the $394,900 debt service divided into the $650,000 available cashflow. It’s a simple calculation. You divide the $394,000 into the $650,000 and you get the 1.65%. The minimum coverage ratio that the SBA requires for its banks is it is a pretty low 1.15%. However, the banks still have to lend according to their own policies and procedures. Certainly, as you get up in dollar amounts. This is more true that the banks will want something north of 1.2% or even a 1.25% in coverage ratios. We have had deals that have gotten done when you have 1.17% coverage but those are going to be the smaller deals. If you take a typical $3 million deal to a bank, chances are, they’re not going to get really comfortable if the coverage is only a 1.17%. You’re safe at a 1.2% or higher provided again all of their aspects of the transaction are adequate or sufficient, but most of the banks want something a little bit higher.

The thing that I would highlight here to prospective buyers that are reading this episode is whether you own a business and looking to grow through acquisition or you’re looking to make your first acquisition. Whenever you can acquire a business that has traditionally historically about $750,000 of adjusted EBITDA, to acquire that business, you only need to take $300,000 of your own capital and it’s going to cost you about $400,000 a year over ten years. To get that $750,000, you’ve given yourself a $350,000 cushion. The business can even decline a bit and you’re going to have plenty of cushions here to make the debt service coverage and pay yourself a good salary. This is when I point to oftentimes the differences between buying a business versus starting a business. This is one of the reasons I love buying existing businesses because you’re walking into immediate cashflows. If you’re a good fit for that business, hopefully, you’re going to take it to the next level and these numbers are going to look even better.

Try to understand the trends. Share on X

You get lost sometimes in these coverage ratios and analysis, but the reality is that these are the approach that has proven successful in the lending world. If your debt service is $394,000 and your cashflow is $750,000, you’ve got a pretty nice little cushion there even though you may be at a 1.5%, 1.4%, 1.6% worth of coverage.

Let’s move over to the other side of the ledger. With the CARES Act, we get some tremendous benefits and real incentives for buyers to get a deal done between now and the end of September 2021.

The big thing here is that the SBA fee is waived. Any deal that is approved booked and fully dispersed by the end of September 2021, the SBA fee will be completely waived. That $66,000 that otherwise you would have as part of your project cost is no longer there. In our example here, we’ve got their $3 million purchase price. The only other component of the project costs is the bank’s closing costs, which we’re estimating at $10,000. You’ve got a project cost of $3,010,000 compared to the previous version of $3,076,000. That drops down your required equity injection. These numbers don’t look that dramatic, but your equity injection here’s $301,000, whereas before, it was $307,000 roughly. The seller note is still the same $300,000. Your bank loan now because you no longer have those SBA fees in there is $2,409,000 compared to $2,468,000.

This doesn’t seem like a lot, but when we get to the bottom here, and we talk about a loan that’s advertising over ten years, it’s a significant difference. We’ll go through the rest of this, but you’ll see how that SBA fee being waived and one other big incentive make a big difference.

If you follow it down in the structure here, we’ve got that $2,409,000 loan, 10-year term, 5.5% interest. Your monthly payment is $26,144. Whereas the prior version was $26,789.

On an annual basis, it’s about $8,000 difference.

On an annual basis, it’s $7,700 and change. Your total debt on an annual basis is $313,728. The seller note stays at the same. We kept that in at 5%, in 5 years. The same with the line of credit, $100,000 at 5.5%. You get $5,500 of interest. Now here, your total debt service, because of the lower bank payment, is $387,164 compared to the prior $394,900. The difference there is $7,736. It’s a ten-year loan. If you multiply that by 10 years or 120 months, your savings are going to be $77,360. That’s a nice thing and that alone is a good thing.

The other aspect that I’m not sure we touched on yet is that one of the other benefits of the CARES Act is that the SBA pays the first three months of principal and interest to the bank on your behalf for every SBA loan that’s booked and fully dispersed before the end of September 2021. Those three payments are capped at $9,000. In this case, your payments are more than $9,000. They will pay $9,000 a month, or $27,000 in the first three months. Your savings with the CARES Act benefits are that $27,000 plus the $77,000. You’re saving over $104,000 due to the benefits if you book an SBA deal before September 2021.

That’s a big deal over the life of a loan at $3 million. Some tremendous benefits here for people who are looking to buy a business and can get it done before the end of September 2021. You still have time to be well within that window, but the clock is ticking. As we get into late May or early June 2021, people are going to need to have to hustle in order to meet those requirements because you throw in diligence and closing time, bank time and you got to figure, you need at least 90, sometimes 120 days to close the deals. Back yourself up from the end of September and figure out when you need to have a deal under contract. The 90 to 120 days is assuming everything goes pretty well or maybe a few hiccups here and there.

You may need even more time than that if you’ve got a deal that you know is going to have some stumbling blocks or speed bumps along the way. Doug, this has been tremendous. As I mentioned to everybody, this spreadsheet side-by-side comparison is going to be available on our website Go to the Resources tab and we’ll have it there for you to be able to download it. You can see it side by side. Doug, if people are needing to understand more about SBA loans or help them get a loan. I know you work with about eighteen banks. You’ve got a bank for about every situation. You can even be competitive in the sense that you could shop a deal to a couple of different banks to see where the best deal is for each client. How can people get in touch with you?

My email address is [email protected]. My website is My phone number is (773) 368-9611. If you are interested in talking about whether or not you qualify as a buyer, I would be happy to go through that with you. The other thing about it is looking at the cashflow. We talk about the assumption of $750,000 worth of cashflow but what makes up that cashflow. We need to look at those kinds of things as you and I do all the time. Are these add-backs legitimate? Aren’t they verifiable? We can help you through that process. It’s been working well.

The road to getting a deal done is hard, and you need experts. You are an expert. I highly recommend people contact you if they’re going down this path and need lending. Doug, as always, it’s great content. I always appreciate you being here. Thanks so much.

Thank you for having me, Domenic.

I hope you enjoyed this episode. If you enjoy our content, please remember to subscribe and review our show. I look forward to seeing you again on the next episode. Until then, please remember that scaling, acquiring or selling a business takes time, preparation and the proper knowledge.

 Important Links:

About Doug Adams

MAU 97 | Small Business Acquisition Loan

Doug Adams is the principal and president of Emerson Capital Corp. Doug has over 30 years experience in small business lending including: Acquisition finance structuring, Loan Structuring, Credit Underwriting, Expansion financing, Partnership buyouts and equipment financing. Additionally, Doug has SBA loan program expertise, with well established lender relationships.


Love the show? Subscribe, rate, review, and share!

Join the M&A Unplugged Community today: