ILLUSTRATIVE · HYPOTHETICAL NUMBERS · NOT AN OFFER OR APPROVAL
1. The deal
A buyer with relevant experience is acquiring an established, owner-operated service business and wants to finance the purchase, closing costs and some working capital. The seller is willing to carry a note on standby.
2. Sources and uses
| Uses | $ |
|---|---|
| Purchase price | $1,000,000 |
| Closing and fees | $50,000 |
| Working capital | $100,000 |
| Total project | $1,150,000 |
| Sources | $ |
|---|---|
| Bank loan, SBA-backed | $1,035,000 |
| Buyer cash | $57,500 |
| Seller note (standby) | $57,500 |
| Total sources | $1,150,000 |
Loan assumed at 10% over 10 years: about $13,678 a month, $164,131 a year.
3. Cash flow and coverage
| Net income, most recent year | $300,000 |
| + Interest, depreciation, amortization | $80,000 |
| + One-time items (support required) | $30,000 |
| - Maintenance capital spending | -$20,000 |
| Cash flow before owner pay | $390,000 |
| - Owner pay needed from the business | -$90,000 |
| Business cash available | $300,000 |
| ÷ Annual debt service on the deal | $164,131 |
| Business coverage | 1.83x |
| Household: cash after taxes (20%) and living costs | $240,000 |
| ÷ Deal debt service + personal debt payments | $188,131 |
| Global coverage | 1.28x |
How each line is built, and why: how lenders calculate cash flow.
Stress test
| Scenario | Business | Global |
|---|---|---|
| Your numbers | 1.83x | 1.28x |
| Cash flow 10% lower | 1.59x | 1.11x ▼ |
| Cash flow 20% lower | 1.35x | 0.94x ▼ |
| Rate 1 point higher | 1.75x | 1.23x ▼ |
| Rate 2 points higher | 1.68x | 1.19x ▼ |
▼ below the 1.25x target used in this example. Lender minimums vary.
4. Open items a lender will ask about
- Support for the one-time items. Invoices and a short explanation for the $30,000 added back.
- Records tie together. Seller's returns, books and the description of the business agree.
- Source of the buyer's cash. Statements showing where the $57,500 comes from.
- Standby note terms. Written agreement that it is subordinate and on standby.
- Lease. Remaining term, renewal options and landlord consent to the sale.
- Owner pay. Confirm the $90,000 assumption matches the buyer's plan for running the business.
- Eligibility screen. Ownership, business type and use of proceeds. Pending.
5. Document checklist
| Business tax returns, last three years | Received |
| Year-to-date profit and loss, balance sheet | Received |
| Personal financial statement and returns | Requested |
| Letter of intent | Received |
| Seller's returns and financials | Requested |
| Lease and landlord consent | Needed |
| Debt schedule, personal and business | Needed |
See documents you will need and what a lender-ready request includes.
6. Options side by side
A. SBA-backed loan with a standby seller note
Cash you put in: $57,500.
Illustrative payment: about $13,678 a month.
Good for: a lower cash requirement and a long term.
Watch for: eligibility and program rules, fees, and the standby terms.
B. Conventional bank loan
Cash you put in: often more than option A.
Illustrative payment: depends on term; usually shorter than option A.
Good for: fewer program requirements.
Watch for: a shorter term raises the payment and lowers coverage.
C. Larger paying seller note, smaller bank loan
Cash you put in: varies.
Illustrative payment: two payments to cover, not one.
Good for: keeps the seller invested in the handover.
Watch for: a paying note adds to debt service and may not count toward your cash.
Options are for comparison, not a recommendation. The choice is yours, and sometimes the best path is not an SBA loan.