The Acquisition Capital Stack

Short answer: When you buy a business, the money almost never comes from one place. It comes in layers, each with a different cost, a different priority if things go wrong, and a different lead time to arrange. Those layers are the capital stack. Here is what each one is and what it does, from the cheapest and most senior at the top to the most expensive at the bottom.

Senior debt, the cheapest money

Senior debt sits at the top of the stack and gets paid first, which is why it is the cheapest. It is also the slowest to arrange, because the lender wants clean financials and a track record. Start that conversation before you have a target under contract, not after.

SBA 7(a) is the workhorse for acquisitions under about five million dollars. It funds most of the purchase, usually asks for around ten percent of the deal as buyer cash, carries a personal guarantee, and runs up to ten years, or up to twenty-five when real estate is part of the deal. The rate floats with the prime rate.

SBA 504 is for the real estate or major equipment in a deal. It is long, fixed, and cheap, structured as a split between a bank, a development company, and your cash. When a building is in the deal, splitting it onto a 504 usually lowers the blended cost and stretches the payments out.

Conventional senior debt is a straight bank loan, used when the SBA does not fit or the buyer would rather avoid it.

Lenders size senior debt to what the business can actually service, not to what they could theoretically lend. The measure is debt-service coverage, and the standard for an acquisition is about 1.25 times: the business should throw off at least a dollar and a quarter of cash for every dollar of debt payment. Structure to more cushion than that if you can, because a deal sized to the bare minimum has no room for the first bad quarter.

Private credit and mezzanine, speed and gap-filling

When a bank cannot move fast enough, the deal is too big for the SBA, or the business is not bankable, private credit steps in. It is non-bank money, faster to close and more expensive, usually in the low to high teens. Mezzanine debt sits just above equity, fills a gap that senior debt will not cover, and sometimes takes a small slice of upside along with its interest. Both show up once a deal moves past the SBA range.

Seller financing, patient money that aligns the seller

A seller note is the seller carrying part of the price as a loan you pay back over time, usually a few years at a single-digit rate, secured behind the senior lender. It is the most flexible instrument in this size range and often the difference between a deal that closes and one that does not. It also aligns the seller with a clean handoff, because a seller holding paper wants the business to survive.

Two cousins of the seller note solve specific problems. An earnout pays the seller their number only if the business hits agreed results after close, which bridges a gap when you and the seller disagree on what the business is worth. A holdback or escrow keeps a slice of the price in reserve to stand behind the seller's promises about the business.

Working capital, the layer owners forget

The purchase price is not the whole bill. The business needs cash to keep running through the transition, and integrating it costs money before it saves any. A stack that funds only the price and nothing else is how a profitable company runs out of cash right after closing. Size the working-capital layer on purpose, not as an afterthought.

Equity, the most expensive money

Equity is your own cash, or an outside partner's, and it is the most expensive layer because it is first to lose and last to get paid. On an SBA deal the buyer typically brings around ten percent of the deal in cash. Above the SBA range, outside equity from a family office or a co-investor fills a larger share, and the price of that equity is ownership and control.

Rollover equity is a seller keeping a stake instead of cashing out fully. It lowers the cash you have to raise and gives the seller a second bite if the business grows. And equity raised from strength, before you need it, costs a fraction of equity raised in a squeeze.

How the layers fit together

You fill the stack from the top down. Take the sensible maximum of senior debt the business can service, fill the remaining gap with seller financing and rollover, and your equity is what is left. The consideration mix you negotiate, how much seller note, how much earnout, how much rollover, is what decides how much cash the senior layers and your own equity actually have to raise. That is why deal structure and the capital stack are the same conversation, and why the stack for a program of acquisitions gets designed a move or two ahead of the deals rather than after them. More on that in how to fund a roll-up before it stalls, and you can model what a multi-deal program does to your numbers with the acquisition calculator.

The specific rates, terms, and rules move constantly, and the SBA in particular changes its requirements from year to year. Treat the figures here as the shape of the thing, not a quote, and confirm the current terms on any live deal.