SBA Deal Structuring: From LOI to Closing

I think the single biggest gap between originators who close deals and originators who lose them comes down to deal structuring. Not product knowledge, not rate quoting, not even sourcing. It's the ability to look at a transaction from every angle, spot the weak points before the lender does, and build a structure that actually works.

I've reviewed hundreds of SBA deals over the years, and the pattern is consistent: the ones that die on the table almost always had a structural problem that somebody missed early on. The ones that close were structured by someone who understood how all the pieces fit together — the letter of intent, the seller note, the equity injection, the debt service coverage, and the collateral position.

"You are looking at a transaction at the very beginning, trying to find all of those little potential issues down the road so that you can prepare against it. You can build your case, so to speak, against those issues and mitigate those issues as best you can." — Brian, Episode #11

That quote captures the whole philosophy of SBA deal structuring. You're not reacting to problems. You're spotting issues before they surface and building a case that addresses them preemptively. That's what this guide is about. Not the textbook version. The real version.

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The Anatomy of an SBA Deal — What "Structure" Actually Means

Before we get into the individual components, I think it's worth stepping back and looking at the full picture of how these transactions are put together. An SBA acquisition deal has moving parts that all need to work in concert. If one piece is off, the whole thing can unravel.

Here's the basic architecture. A buyer identifies a business, negotiates terms with the seller, and memorializes those terms in a letter of intent. The buyer approaches a lender and submits a loan package — LOI, business financials, personal financial statements, business plan, and supporting documentation. The lender underwrites by evaluating cash flow, buyer qualifications, collateral, and overall structure. If everything checks out, the loan goes to committee, gets approved (sometimes with conditions), and moves toward closing.

That sequence sounds straightforward. But most deals hit at least one structural snag between LOI and closing.

"I think it really comes down to, so often with SBA, we're doing a balancing act. We're looking at a deal and we're saying, okay, how's the cash flow? How's the EBITDA of the business? How has the borrower's experience? What's their injection look like?" — Brian, Episode #19

That balancing act — which Brian explored in detail on The Year of Discipline episode — is what "structure" means. It's not any single element in isolation. It's how the equity injection, the seller note, the DSCR, and the collateral position all work together to tell a story the lender can get behind. If you want the full picture of SBA 7(a) loan mechanics, our Complete Guide to SBA 7(a) Loans is the place to start.

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The Letter of Intent — Getting It Right Before Anything Else

I think a lot of buyers and even some originators treat the LOI as a formality — just a document that says "we agreed on a price, let's move forward." That sort of thing. But for an underwriter, the LOI is one of the first documents they scrutinize.

What lenders want to see in an LOI:

• Purchase price and how it was determined
• Down payment amount and source
• Seller note terms, if applicable (amount, rate, standby status)
• What's included in the sale (assets, inventory, real estate, goodwill)
• Contingencies (financing, due diligence, lease assignment)
• Transition plan — how long the seller will stay post-closing

They're also looking for red flags. If the purchase price seems disconnected from earnings, that's a problem. If there's no mention of equity injection, that's a problem. Vague terms signal to the underwriter that the parties haven't thought the deal through.

I've seen transactions where a poorly drafted LOI created confusion that persisted all the way through closing. The buyer thought the price included inventory. The seller thought inventory was separate. Nobody clarified it, and three months later we're restructuring because the numbers don't work with $150,000 of additional inventory cost layered on top.

If you're an originator, review the LOI before it gets signed. Not as an attorney — that's not your role — but as someone who understands what the lender needs to see.

For a broader look at what lenders evaluate in acquisition deals, check out our guide on SBA Business Acquisition: What Lenders Really Expect.

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Seller Notes and Standby Agreements — The Most Misunderstood Weapon

Seller notes are one of the most misunderstood — and most powerful — tools in SBA deal structuring. When a seller agrees to carry a note, they're financing a portion of the sale themselves. The buyer pays part of the purchase price upfront, the SBA lender finances the bulk, and the seller agrees to receive the remaining balance over time, with interest, after closing.

Here's where it gets interesting from a structural standpoint. In SBA transactions, if the seller note is being counted toward the buyer's equity injection, that note must be on full standby for a minimum of 24 months — or in some cases, for the life of the SBA loan. Full standby means no payments of principal or interest during the standby period. The seller is essentially agreeing to wait while the SBA lender gets paid first. That sort of thing is a tough sell for a lot of business owners who want their money.

And that's exactly why seller notes can be a deal signal. As Shane put it:

"Red flag! The guy is like absolutely unwilling to give even a little bit of a seller note. What the hell is wrong with that business? What is he hiding?" — Shane, Episode #19

A seller who refuses to carry any paper is essentially saying, "I don't believe in this business enough to have any continued exposure to it." That doesn't mean every seller has to carry a note. There are legitimate reasons to want a clean exit. But when a seller is completely unwilling to put even a small portion at risk, it raises questions the lender is going to ask anyway.

Steph drove this point home on the podcast:

"The gap ends up killing the deal. And I think that a lot more people now are entertaining seller financing just because they need to get to that final amount. And we can't get there." — Steph, Episode #15

Along those lines, the mechanics of standby agreements matter a great deal in terms of how the deal is structured. If the seller note is on standby and counts toward equity, you're reducing the cash the buyer needs to bring in. If the seller note is not on standby — meaning payments begin immediately — then it becomes part of the debt burden and gets factored into the DSCR calculation. That's a significant difference, and it can be the difference between a deal that pencils out and one that doesn't.

| Seller Note Status | Counts as Equity? | Affects DSCR? | Minimum Standby Period | |---|---|---|---| | Full standby (no P&I payments) | Yes | No | 24 months (some lenders require life of loan) | | Partial standby (interest-only) | Varies by lender | Partially | Typically 24 months | | Not on standby (full payments) | No | Yes — counted as debt service | N/A | | No seller note at all | N/A | N/A | N/A |

For a deeper exploration of seller financing in SBA transactions, our Seller Notes Deep Dive episode covers this extensively.

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Equity Injection — The Math That Makes or Breaks Your Deal

Equity injection is probably the single most contentious element of SBA deal structuring right now. The SBA Standard Operating Procedure requires a minimum of 10% equity injection on change-of-ownership transactions. That means the buyer needs to contribute at least 10% of the total project cost — not just the purchase price, but everything: purchase price, working capital, closing costs, and any other eligible expenses rolled into the loan.

Steph has been clear about this being the central issue:

"Equity is the number one killer of small business. Not collateral. Not credit. Equity is the number one killer of small business." — Steph, Episode #19

She's right. I've watched deal after deal stall or die because the buyer couldn't meet the equity injection requirement. The business was solid, the buyer had experience, the DSCR was fine — but they didn't have the cash.

So where does equity injection come from? Acceptable sources include cash savings, retirement account rollovers (through structures like ROBS — Rollover for Business Startups), gifts from family members with proper documentation, the sale of personal assets, and seller notes on full standby. What's not acceptable is borrowed money that creates additional debt service. If you take out a personal loan to cover your injection, the lender is going to flag it, because now you've got additional debt that affects your personal cash flow and the deal's DSCR.

Whether it was a buyer who had savings but not enough, or a buyer who was relying entirely on a family gift that fell through, the equity piece is where I've seen more deals collapse than anywhere else. The key thing originators need to understand is that equity injection isn't just a checkbox. It's a reflection of the borrower's commitment and financial capacity.

For more on creative financing structures that can help with equity, see our article on 100% Financing for Business Expansion.

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DSCR Calculations — What Lenders Are Really Looking At

Debt service coverage ratio is where the math either works or it doesn't. The DSCR measures whether the business generates enough cash flow to cover its debt obligations, and it's the single most important number in the underwriting process.

The formula: adjusted EBITDA divided by total annual debt service — SBA loan payment, any non-standby seller note payments, and any other existing debt staying with the business. The SBA minimum is 1.15x.

Here's a real-world example. A business has $650,000 in adjusted earnings. Annual debt service on the SBA loan is $500,000. The DSCR is $650,000 / $500,000 = 1.3x. That's above the 1.15x minimum and gives the lender a comfortable cushion. But drop those earnings to $580,000 and the DSCR falls to 1.16x — barely clearing the threshold, with almost no room for a rough quarter.

| Scenario | Adjusted EBITDA | Annual Debt Service | DSCR | Lender Comfort | |---|---|---|---|---| | Strong deal | $650,000 | $500,000 | 1.30x | Comfortable — room for a dip | | Adequate deal | $580,000 | $500,000 | 1.16x | Tight — needs strong borrower profile | | Below threshold | $490,000 | $500,000 | 0.98x | Declined as structured | | Restructured (lower price) | $580,000 | $440,000 | 1.32x | Back in comfortable range |

The levers to improve DSCR: extend the loan term to lower payments, reduce the purchase price, put a seller note on full standby so it doesn't count as debt service, or increase equity injection to reduce the loan amount. Each move has trade-offs, and part of being a skilled originator is knowing which lever to pull.

If a borrower ends up in a situation where the debt service becomes unmanageable post-closing, we cover the options in What to Do If You Can't Pay Your Business Loan.

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Collateral and Personal Guarantees — What You're on the Hook For

Collateral in SBA deals is often misunderstood. The SBA does not require full collateralization. If the deal is strong on cash flow, borrower experience, and equity injection, the lender can approve a loan even if the collateral doesn't fully secure the debt. That said, the lender is required to take all available collateral — the business assets being acquired, any real estate the borrower owns, and a lien on personal assets.

The personal guarantee is not optional. Every owner with 20% or more ownership in the business is required to personally guarantee the SBA loan. Their spouse may also need to guarantee if they hold community property or joint assets being pledged. This is a hard requirement in the SOP, and no lender has the discretion to waive it.

I think the collateral conversation often gets overweighted relative to its actual impact on deal approval. I've seen deals with strong cash flow and weak collateral get approved, and I've seen deals with excellent collateral and weak cash flow get declined. Cash flow is king. Collateral is secondary — a safety net for the lender if things go wrong.

Reserves matter more than most people think. A borrower with $100,000 in real estate equity but zero working capital reserves is riskier than a borrower with modest collateral and six months of operating expenses set aside. The first borrower might survive a lien foreclosure. The second can actually survive a bad quarter.

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Deal-Killers — The Structural Mistakes That Sink Transactions

Over the years, I've built a mental list of things that kill deals. Not things that slow them down or create conditions — things that actually cause a transaction to die.

1. Insufficient equity injection. The number one killer, full stop. The buyer doesn't have the cash, can't document the source, or tries to borrow their way into the injection. Have the equity conversation before you submit the package.

2. Unrealistic projections. Buyers who show revenue doubling in year one without a credible plan. Lenders underwrite to historical cash flow, not aspirational projections. Ground the business plan in the last three years of actual financials.

3. Seller unwilling to carry any paper. As we discussed, a seller who won't carry a note raises questions about the business's viability. Understand the seller's reasoning. If they have legitimate reasons, document that. If they just don't want exposure, dig deeper.

4. Tax return inconsistencies. When the business tax returns don't match the financial statements, underwriters lose confidence fast. Discrepancies of even 10-15% between reported revenue on returns and the P&L will trigger a deeper dive.

5. Buyer has no relevant experience. SBA lenders evaluate the buyer's ability to operate the business. If the buyer lacks direct experience, build a case for transferable skills and structure a transition period where the seller stays on for 6-12 months.

6. Lease issues. The business operates from leased space, and the lease is expiring, below market, or has assignment restrictions. Get a lease assignment or new lease commitment early. Don't wait until closing to discover the landlord won't cooperate.

7. Environmental or legal liabilities. Undisclosed lawsuits, environmental contamination, regulatory violations — any of these can kill a deal instantly. This is where spotting issues through thorough due diligence becomes critical.

If you're looking to build the skills to identify and mitigate these problems before they kill a deal, our SBA Loan Originator Training program walks through real deal scenarios.

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Case Studies: A Deal That Got Restructured and One That Couldn't Be Saved

I think the best way to understand deal structuring is to see how it plays out in actual transactions. These are anonymized, but the structures and the lessons are real.

The Restructured Deal

A buyer was acquiring a specialty services business doing $1.2 million in revenue with $165,000 in adjusted EBITDA. Purchase price was $490,000. The buyer had $28,000 in savings and was counting on a gift from a family member for the remaining injection.

The problems surfaced immediately. Total project cost — purchase price, working capital, closing costs — came to approximately $560,000. A 10% injection meant the buyer needed $56,000. With $28,000 in savings and a $25,000 gift, they were at $53,000 — just short. The gift required documentation (gift letter, source verification, proof it wasn't a loan), and the family member was slow to produce the paperwork.

Then the DSCR came in tight. At $490,000 financed on a 10-year term, annual debt service was roughly $65,000. With $165,000 in EBITDA, the DSCR was about 1.18x after factoring in the buyer's salary draw. Technically above 1.15x, but the lender was uncomfortable with the thin margin, the incomplete equity documentation, and the buyer's limited experience.

We restructured. The buyer negotiated the purchase price down to $460,000, which reduced the loan amount and improved DSCR to 1.25x. The seller agreed to carry a $30,000 standby note, solving the equity injection gap. The family member finally produced the gift documentation. The deal took 94 days to close and required two rounds of conditions from committee.

What made it work: Flexibility on everyone's part. The buyer negotiated harder on price. The seller carried paper when they understood it was the only path to closing. The originator identified the structural weaknesses early and proposed solutions before the lender had to ask.

The Deal That Couldn't Be Saved

A buyer was looking at a small food service business — a restaurant with catering. Revenue was $900,000, and the seller represented adjusted EBITDA of $210,000. Purchase price was $625,000. On paper, the deal looked workable. But the problems were layered, and each one compounded the next.

First, the buyer had $30,000 in cash. Total project cost was approximately $720,000, meaning they needed $72,000 in equity. The buyer was $42,000 short and had no additional sources — no retirement funds, no family gift, no assets to sell. The seller initially refused to carry any note.

Second, when the lender pulled the tax transcripts, the revenue on the returns didn't match the seller's financials. The returns showed $780,000 in gross revenue, not $900,000. That $120,000 gap wiped out most of the adjusted EBITDA. When the lender recalculated based on transcript numbers, EBITDA dropped to roughly $90,000. The DSCR on a $625,000 purchase was nowhere close to 1.15x.

Third — and this is the one that sealed it — Shane shared a story about a similar deal where the seller's behavior during transition killed the business. The seller was rude to customers during the handover period, driving regulars away. In this case, the seller had a reputation for being difficult, and the buyer's transition plan was thin. The lender had no confidence that customer relationships would survive the change.

We tried to restructure. The buyer asked the seller to reduce the price to $450,000 to match the actual financial performance. The seller refused. The buyer asked for a seller note on standby to close the equity gap. The seller refused. We explored ROBS, but the buyer's retirement account had less than $15,000. There was simply no path to a deal that cleared underwriting.

What killed it: Three things working against each other simultaneously — an equity gap with no solution, financials that didn't hold up under scrutiny, and a seller who wouldn't flex. Any one of those problems might have been solvable. All three together made the deal impossible to structure. Sometimes the right answer is to walk away and find a better acquisition target.

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Keep Reading

If you want to go deeper on the craft of deal structuring — the difference between a package that satisfies the SOP and one that tells a story the credit committee can get behind — read The Art of SBA Deal Structuring. It covers LOI strategy, DSCR stress testing, and knowing when to walk away.

Financial analysis is where most originators either earn their keep or lose their credibility. Our guide on how to read borrower financials like a pro covers the 5 C's framework, cash flow analysis, and the red flags that blow up deals in underwriting.

The eight failure points that kill SBA deals over and over are documented in Why Most SBA Deals Fall Apart. If you can spot these patterns early, you save months of work on transactions that were never going to close.

For the equity injection argument straight from someone who spent decades processing liquidation packages, Episode 20: Why Equity (Not Cash Flow) Makes or Breaks SBA Deals features a former SBA deputy director of liquidations who has seen what happens when thin deals go sideways.

And if you want to hear what the boomer retirement wave looks like from the acquisition side — and why the window for buying cash-flowing businesses is wide open right now — Episode 5: Broke or Billionaire by 2030 is the episode that lays it out with real numbers.

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Frequently Asked Questions

What is a standby seller note?

A standby seller note is financing provided by the seller where payments of principal and interest are deferred for a specified period — typically 24 months minimum for SBA transactions, though some lenders require standby for the life of the SBA loan. During standby, the buyer makes no payments to the seller. When on full standby, the seller note can count toward the buyer's equity injection, reducing the cash they need to bring to closing.

How do you calculate DSCR for an SBA deal?

Divide the business's adjusted EBITDA by the total annual debt service. For example, $200,000 in EBITDA divided by $160,000 in annual loan payments equals a 1.25x DSCR. The SBA minimum is 1.15x. Most experienced lenders prefer 1.25x or higher for comfort, though deals at 1.15x get approved regularly when the borrower profile is strong.

What happens if the deal doesn't meet the 1.15x DSCR threshold?

The deal as structured won't get approved. Your options: negotiate a lower purchase price to reduce debt service, increase the equity injection so less needs to be borrowed, put a seller note on full standby so it doesn't count as debt, or extend the loan term to reduce annual payments. Some lenders have limited discretion to approve deals slightly below 1.15x with strong compensating factors, but I wouldn't count on that as a strategy.

Can I use gift funds for equity injection?

Yes, but they require thorough documentation. The lender needs a gift letter confirming the funds are a gift with no expectation of repayment, proof the donor has the financial capacity, and verification the funds have transferred. The key distinction is that it must be a genuine gift, not a loan. If the lender suspects the "gift" is actually borrowed money, they'll either disqualify it as equity or count it as additional debt in the DSCR calculation.

How long does an SBA acquisition deal take from LOI to closing?

A straightforward deal takes 60-90 days. Deals with complications — equity issues, appraisal disputes, lease negotiations, SBA authorization delays — can stretch to 120 days or more. The single best thing an originator can do to speed up the process is submit a complete, well-organized loan package on the first submission. Incomplete packages create back-and-forth that adds weeks.

What collateral does the SBA require?

The SBA requires lenders to take all available collateral but does not require full collateralization. The lender will take a lien on the business assets being acquired and look at the borrower's personal assets — real estate equity, investment accounts, and that sort of thing. If combined collateral doesn't fully secure the loan, the deal can still be approved if cash flow, borrower qualifications, and overall structure are strong.

Does the seller have to stay involved after closing?

No SBA requirement, but most lenders strongly prefer a 60-90 day transition period. A seller who stays on to train the buyer and introduce key customers gives the lender confidence that critical relationships won't walk out the door on day one.

Can I structure an SBA deal with no money down?

True zero-down SBA acquisitions are extremely rare. The SOP requires a minimum 10% equity injection on change-of-ownership. You can reduce out-of-pocket cash through standby seller notes, ROBS rollovers, or gift funds — but real value needs to flow in from the buyer. Lenders want commitment, and commitment means having something at risk.

What's the difference between SBA 7(a) and SBA 504 for acquisitions?

The 7(a) program is the primary vehicle for business acquisitions. The 504 program is designed for real estate and major equipment purchases, not change-of-ownership transactions. If you're acquiring a business that includes real estate, a 7(a) can cover both. Some originators pair a 7(a) for the acquisition with a 504 for the real estate component, but that adds complexity. For most straightforward acquisitions, the 7(a) is the right tool.

How do I know if a deal is worth trying to restructure or if I should walk away?

I think it comes down to how many structural problems you're solving simultaneously. One problem — tight DSCR, equity gap, seller hesitation — is usually fixable. Two problems require creativity and cooperative parties. Three or more problems stacking on top of each other, especially when the seller won't budge, is usually a signal to move on. Your time as an originator has value. Spending three months trying to save a deal that has fundamental structural flaws is time you could have spent closing two clean ones.

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Master Deal Structuring

The throughline across everything we've covered is that deal structuring is both a science and a craft. The science is knowing the rules — the SOP requirements, the DSCR minimums, the standby periods, the collateral policies. The craft is knowing how to apply those rules to a specific transaction with specific people and specific problems.

The originators who master this framework don't just close more deals. They close better deals — deals where the borrower has adequate reserves, the DSCR has breathing room, and the structure is sound enough to survive the inevitable bumps of a first-year ownership transition.

Master deal structuring in our training program: learn.lordsoflending.com/pricing

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This content is for educational purposes only and does not constitute legal, financial, or investment advice. Consult with a qualified attorney, CPA, and financial advisor before making business or financing decisions. Loan terms, rates, and programs are subject to change and vary by lender.