The Capital Stack Nobody Draws for You
A $6 million acquisition almost never gets paid for with $6 million of one thing. It gets built out of 4 or 5 sources stacked on top of each other, each with its own price, its own patience, and its own claim on the business if things go sideways. Owners who have run a company for 15 years and never borrowed more than a truck loan meet this stack for the first time at the worst possible moment, which is after they have already fallen for the business they want to buy.
The stack is not complicated once someone draws it for you. The trouble is that no one usually does. The broker is selling. The seller wants the number. The banker explains their layer and stops. Nobody is paid to show you the whole thing at once, which is exactly why it pays to understand it before you sign anything.
The layers, from cheapest to most expensive
Senior debt sits on the bottom and costs the least, because it gets paid first. For deals under $5 million, that layer is usually an SBA 7(a) loan. The program raised its cap to $5 million in 2025, up from $3.75 million, which quietly moved a lot of deals from "needs outside equity" to "financeable on a bank line." The rates are not cheap. Through 2025 the 7(a) note floated on a prime-plus basis in the low double digits, roughly 10 to 11 percent, and it resets quarterly, so the number on your first payment is a starting point rather than a promise.
That loan comes with strings the brochure does not lead with. The SBA rewrote its underwriting rules under a new operating procedure effective June 1, 2025, tightening eligibility that had loosened in prior years. You will inject at least 10 percent of the purchase price yourself, some of which can be a standby seller note if the seller agrees to sit behind the bank. And you will sign a personal guarantee. The business is the borrower on paper. You are the borrower in fact, and the two get confused only until the first payment is missed.
The seller is a lender, whether they meant to be or not
Above the bank sits the seller note. In most lower middle market deals the seller finances a slice of their own sale price, and they charge for it. Rates on those notes have been running north of 11 percent, which surprises sellers who assumed financing meant a favor. It does not. A seller note is a loan, priced like a loan, and it is subordinate to the bank, which means in a bad year it is the layer that does not get paid.
That subordination is the whole point of the layer. The bank requires it. The seller accepts it because the alternative is a lower price or no deal. What matters for you, the buyer, is that a seller note costs less in cash today and more in claims tomorrow. It is patient, not free. Treating it as free is how a deal that pencils on the multiple stops penciling on the payments.
Coverage is the number that actually governs the deal
Owners fixate on the price. Lenders fixate on whether the combined cash flow covers the combined debt service in a bad year, not a good one. That ratio, debt service coverage, is the real gate. You can agree to a fair price and still fail to close, because the stack you built to pay for it demands more each month than the business reliably throws off when a large customer slows down.
Run it the way a lender does. Take the earnings you actually believe, not the ones on the memo. Subtract what you need to live on and what the business needs to keep running. What is left is what services debt. Then stack debt against it until the coverage gets thin, and stop one layer before that. The gap between the price you want to pay and the price the cash flow can carry does not get filled by optimism. It gets filled by more equity, a bigger seller note, or a lower price, and you should decide which before the bank decides for you.
Cheap money is patient and senior. Expensive money is impatient and junior. Most deals need some of each, and the whole discipline is knowing how much of the expensive kind you can carry before the payments start running the company instead of you.