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Many of the first‑time buyers I talk to think that the SBA works like this: you put 10% down, the bank covers 90%, and that’s it. In reality there are a few moving parts that can quietly blow up your deal or change how much cash you really need.

Here’s my easy-to-read version that I wish more buyers heard up front.

1. The “10% down” thing is real, but it’s not always your cash.
The SBA wants at least 10% equity in the deal. On a straight acquisition, at least 5% of this has to be your money, and up to 5% can come from a seller note in the right structure. Soon a $1M deal, you might get in with $50k of your own cash and a $50k seller note covering the rest of the injection.

The catch here is that the seller note has to be on “full standby.” That means the seller gets no principal and no interest payments until the SBA loan is completely paid off, which is usually 10 years. A lot of sellers hear that and say absolutely not, so don’t assume that the 5% from seller piece is easy. It is important to note here that the full standby only applies to the portion of the seller note being used to satisfy the equity injection.

2. The rules have changed and some people are still playing by the old ones.
A couple of years ago seller notes only had to sit on standby for 24 months. Now if the note is counting towards the equity injection, it needs to be on full standby for the whole loan term. That’s a big shift, so if a broker is pointing to old deal structures they did back in 2022–2023, you want to make sure your lender is actually ok with what’s being proposed today.

3. DSCR is the number that really decides if you close or not.
Debt Service Coverage Ratio (DSCR) is just a fancy way of saying how many dollars of cash flow do you have for every dollar of loan payment. Take the business’s cash flow, divide it by your annual SBA payment, and that’s your DSCR. The SBA’s floor is about 1.15, most lenders want to see around 1.25, and if you’re at 1.5 or above you’re usually in a much better spot.

It is important to note here that the bank will subtract an "Owner’s Draw" or "Living Expense" from the cash flow before they calculate that 1.25 ratio. So think EBITA (or a version of SDE) after this reasonable living allowance from a lender perspective.

Where people get burned is on the add‑backs. The CIM might show a beautiful SDE number, but the lender doesn’t have to accept every adjustment. If the bank knocks out a few of the “creative” add‑backs, your DSCR can fall under the line and the deal just dies after you’ve already spent your time and money.

4. Life Insurance Requirement.
Most SBA lenders require a collateral assignment of a life insurance policy for the principal owner. It’s a small detail, but for a what the broker didn't tell you post, it’s a classic hidden cost and hurdle.

5. Personal guarantees actually mean personal.
If you own 20% or more of the business, you’re personally guaranteeing the SBA loan. That usually means your house and personal assets are on the hook, not just the business. That doesn’t mean SBA is bad, it just means you should treat the leverage seriously and not stretch to the edge of what you can barely afford.

I’ve been asked by some of my clients in the past if they could use an LLC to acquire the business and shield their personal assets from this guarantee. When you use an LLC to acquire a business, the LLC is technically the primary borrower. In a standard scenario, this would protect your personal assets from the business's creditors. However, by signing the guarantee, you are waiving the limited liability protection specifically for that debt. 

If the LLC then defaults, the lender goes after the LLC’s assets first. If those are insufficient, the personal guarantee allows them to pivot directly to your personal bank accounts, investments, and in many cases, even take a lien on your home if you have sufficient equity.

An example I like to use is to think of the Personal Guarantee as a Backdoor to your personal bank account. The LLC is the front door, as it stops vendors and customers. But the SBA guarantee lets the bank walk right through the back door and grab your personal assets if the business can't pay.

Bottom line.
The SBA is an amazing tool for buying a small business, but it rewards people who understand the basics before they start sending LOIs around. Thin DSCR, aggressive add‑backs, or a seller who hates standby notes aren’t just negotiation headaches, but they’re the very things that can kill your deal late in the process.

One thing I see first-time buyers consistently underestimate is working capital. Everyone obsesses over the multiple and purchase price, but the thing that actually keeps the lights on after closing is how much “fuel in the tank” you’re getting with the business.

Most CIMs I see have pages on add-backs with almost nothing on the working capital peg, how it’s calculated, or how the post-close true-up works. That’s where buyers quietly overpay.

What “working capital” really is in SMB land

In plain English, think of working capital as the day-to-day operating cushion you’re buying:

- Accounts receivable 
- Inventory 
- Less accounts payable and accrued expenses 

Cash, long-term debt, and income taxes are usually carved out separately. You’re buying enough AR + inventory – AP to keep the business running without immediately having to write another big check after you close.

If you don’t define that clearly, you’re basically trusting that the seller leaves “enough” in the business.

A simple example of how buyers get clipped

Say you’re buying a contractor for $500K.

- The business is seasonal. Busy from April–September, slow in the winter. 
- The seller brings it to market and you close in February, when AR and inventory are both low. 
- The purchase agreement basically says “customary levels of working capital” without a real definition or target.

You close, start ramping into the busy season, and suddenly realize you need an extra $75K–$100K to fund materials and float receivables before cash actually comes in.

There’s no purchase price adjustment, no true-up. So in practice, you didn’t just pay $500K, you paid $500K + the extra $75K–$100K you had to inject after close, because working capital wasn’t properly pegged.

Same headline deal, very different effective price for the buyer.

What good looks like (from a buyer’s perspective)

On a clean deal, the purchase agreement will usually:

- Define a specific working capital target (often a 12‑month average, adjusted for one-offs and seasonality). 
- Spell out exactly which accounts are included and excluded (AR, inventory, AP, accrued expenses, etc.). 
- Specify how the post-close true-up works, for example in a period 60–90 days after close, the actual working capital at closing is compared to the target and the price is adjusted up or down dollar‑for‑dollar.

That maybe sounds a bit technical, but the principle is simple: you’re paying for a business that comes with a “normal” level of fuel, not one that’s been run on fumes to dress up cash flow before the sale.

Quick checklist for buyers

Before you sign an LOI or purchase agreement, ask yourself:

- What’s the working capital target, in dollars, and how was it calculated? 
- Does that target make sense given seasonality and how cash actually moves through this business? 
- Is there a band or range (like ±5%) where no adjustment is made? If so, how many real dollars does that represent? 
- After modeling out your first 12–24 months post-close, how much additional cash will you realistically have to put in on top of the purchase price?

A deal that looks like $500K on paper can very easily behave like a $600K+ deal once you factor in the working capital you have to inject because it wasn’t properly negotiated up front.

Has anyone here had a post‑closing surprise on working capital? Either a true-up you didn’t expect, or realizing six months in that you essentially bought a business that was under-fueled. What happened, and how did you handle it? 

I come from a Big 4 (EY) and Private Equity (Morgan Stanley) background and have helped clients buy and sell small businesses for years. One of the most consistently misunderstood things I see first-time buyers get steamrolled on is deal structure, specifically whether you're buying the assets of the business or the stock/membership interest.

Brokers gloss over it. Sellers definitely don't volunteer the information. And most posts I've seen here either say "consult a CPA" (not helpful) or give a two-sentence answer that doesn't actually explain the math. So here's what you need to know:

Why you almost always want an asset deal as a buyer

When you buy assets, you get what's called a step-up in basis. That means the purchase price gets allocated across the assets you're acquiring (equipment, inventory, furniture, goodwill, non-compete agreements) and you depreciate those from the new (higher) value going forward.

Simple example: You buy a landscaping company for $500K. The seller's equipment on their books is fully depreciated (worth $0 to them). You allocate $150K of your purchase price to that equipment. Now you're depreciating $150K over 5–7 years. If we assume 5 years for simplicity, that's $30K of depreciation expense per year that you get to take against business income (so roughly $30K of income that’s sheltered from tax each year for 5 years). That's real tax shield, starting year one.  

In a stock deal, you get none of that. You inherit the seller's old depreciation schedule. The equipment is still worth $0 on the books, and you get $0 depreciation expense to offset business income. You paid $500K for the business and get almost no deductible basis from it.

To put some numbers on it, as the buyer in an asset deal, you’re getting $150K of new depreciable basis. If your marginal tax rate is ~37%, that's up to ~$55K of tax savings over the life of that depreciation just from this one allocation decision alone. In a stock deal, that same $150K of basis doesn’t exist for you, but the seller keeps more of the after‑tax proceeds because they avoid ordinary income rates on depreciation recapture.

Why the seller pushes for stock

Because their tax bill is dramatically lower.

In a stock deal, the seller pays long-term capital gains on the entire sale, usually 15–20% federal. Clean, simple, one tax event.

In an asset deal, the IRS breaks the sale into pieces. The allocation matters enormously here. If you load up the purchase price on equipment, the seller pays ordinary income rates on the depreciation recapture, potentially 37% on that chunk. Goodwill gets capital gains treatment, but other categories don't.

So when a seller says "I need it to be a stock deal," what they're really saying is: "I don't want to pay an extra $30–60K in taxes." That's their problem, not yours, but it becomes your problem if you concede it without negotiating a price adjustment.

The bridge: 338(h)(10) elections

If you're buying an S-corp (very common in SMB), there's a tax election called a 338(h)(10) that lets both parties treat the deal as an asset sale for tax purposes while keeping the legal structure of a stock sale. Both sides have to agree to it, and the seller typically needs a price bump to offset their higher tax hit, but it's a real tool worth knowing about.

Not available for every structure (doesn't work cleanly for C-corps or LLCs taxed as partnerships), but if you're looking at an S-corp and the seller won't budge on stock deal, this is worth bringing to the table.

The allocation fight nobody warns you about

Even when both sides agree to an asset deal, the allocation of purchase price is its own negotiation. The IRS requires both parties to file consistent allocations (Form 8594), and how you split the number across asset classes affects both of your tax outcomes.

As a buyer, you want to allocate as much as possible to:
- Equipment / FF&E (fast depreciation, bonus depreciation still available)
- Non-compete agreements (amortized over 15 years, but deductible)
- Working capital assets (step-up carries through)

You also want to minimize allocation to goodwill, not because goodwill is bad, but because equipment depreciates faster and creates more near-term cash tax savings.

The seller wants the opposite. This is a real negotiation and most buyers don't even know it's happening.

Takeaway

Before you get anywhere near LOI, know what entity type you're buying and get your CPA in the room. Not just for due diligence, but to model the after-tax purchase price under both structures. A deal that looks like $500K can cost you an extra $40–80K over 5 years depending on how you structure it.

Has anyone run into issues here, successfully negotiated a 338(h)(10) election, or had a seller dig in hard on stock deal? What did you end up doing?

Feel free to drop questions below, as I’m happy to clarify anything.