Buying an Existing Business: Acquisition as a Path to Ownership

Buying an existing business trades the time and risk of building from zero for immediate cash flow, an existing customer base, a trained team, and operating systems that already work. It's a genuinely different path to ownership than founding a startup: one that's grown significantly as a career path in its own right, often through what's called "search fund" or "self-funded search" acquisition.

The real tradeoff: you're paying for what already exists, and you inherit its actual problems along with its strengths: an underperforming employee, an outdated system, a customer relationship that was more fragile than it looked. Buying well requires being just as rigorous about finding and pricing those inherited problems as you are about valuing the upside.

Why SDE matters specifically: small business financials often run significant personal and discretionary expenses through the company, which distorts a simple profit number. SDE adds back the owner's salary and discretionary spending to reveal what the business would actually generate for a new owner: the real basis most small-business valuation multiples are built on.

The SBA 7(a) loan is the most common financing tool for acquiring a small business, used heavily by both individual buyers and search-fund acquirers. As of 2026, typical terms run up to $5 million in loan size, 10-year amortization, financing roughly 75 to 85% of the purchase price, at interest rates currently around 10 to 11%. Lenders generally require the buyer to put in at least 10% cash (not borrowed funds), and up to 5% of the price can come from a seller note held on full standby (the seller defers repayment until the SBA loan is satisfied), meaning a buyer can often acquire a business with as little as 10 to 15% of the purchase price in their own cash.

Eligibility requirements are real, not a formality: lenders typically look for a buyer credit score of 680+, at least 2 years of relevant management or industry experience, and, critically, the target business itself needs at least 2 years of consistent positive cash flow with a debt service coverage ratio (DSCR) of at least 1.25, meaning its cash flow needs to cover the new loan payments with real margin, not just barely. The full process from LOI to funding commonly takes 60 to 120 days.

As covered in the companion lesson Exit Strategy & M&A from the seller's perspective, buyers generally prefer an asset purchase: it provides a stepped-up tax basis (larger future depreciation deductions) and lets the buyer more selectively avoid inheriting unknown or undisclosed liabilities tied to the prior entity. Sellers often prefer a stock sale for their own tax reasons, which is exactly why deal structure is frequently one of the more actively negotiated terms, sometimes bridged with a price adjustment rather than one side simply getting their preferred structure for free.

The instinct to change everything immediately after taking over is understandable, and usually a mistake. Existing employees and customers are adjusting to new ownership already; layering in a wave of sudden changes on top of that adjustment increases the odds of losing exactly the people and relationships that made the acquisition valuable in the first place. Spend real time in the first 100 days genuinely understanding how the business actually runs before making major changes, build trust with key employees and customers directly, and prioritize retention of what's working over immediate optimization of what isn't.