Before You Look at a Single Business, Know How You Are Paying for It

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How a buyer is funded sorts them into a type, and the type decides the search. Some buyers do not know which type they are, and the individual who thinks of himself as a cash buyer may actually be something else.

The first thing I want to know about a buyer is not what they want to buy. It is how they intend to pay for it, because the answer sorts them into a type, and the type decides almost everything about the search that follows.

This is the piece of the process buyers tend to skip past, because paying for it feels like a problem for later, once the right business turns up. It is the other way around. How a buyer is funded determines which businesses they can realistically pursue, how fast they can move, what a seller will make of them, and, in many cases, whether they are ready to be looking at all. So before I work a single number, I place the buyer in one of a handful of categories, and I want to walk through them the way I actually think about them rather than as a glossary.

The cash buyer and the strategic buyer who is funding an acquisition off an existing balance sheet are the cleanest to work with, because their financing is not contingent on anyone else’s decision. A strategic buyer already operating a company can often move on a deal with a speed and a certainty that a financed individual simply cannot match, and a seller can feel that difference across the table. When two offers are otherwise close, the one that does not depend on a lender’s underwriting timeline is worth more than its number suggests, and I have watched sellers take less money for more certainty more than once.

Private equity firms and family offices are a different animal again, and I run searches for these buyers as well. They arrive with their own capital and return expectations; they have seen more deals than the person selling ever has, and the financing conversation with them isn’t one I need to have, because they’ve already had it internally before they ever called me. What matters with an institutional buyer is fit and thesis, not whether the money is real. The money is real. My job there is a sourcing and fit problem, not a readiness problem.

The unfunded sponsor is the category that calls for the most honesty early, because the label covers two very different people. There is the experienced operator who genuinely raises capital deal by deal and has done it before, and there is the first-timer who has read that this is possible and assumes they can do it too. The difference between them is not the pitch; it is the record. When someone tells me they will raise the equity once they have the deal under LOI, I want to see the capital-raising track record behind that claim, the specific past deals where they actually raised the money and closed. A sponsor who can show me that is a real buyer with a real model. A sponsor who cannot is describing a hope, and a seller will see through it fairly quickly.

Then there is the buyer who needs an SBA-backed lender, and this is the category more individual buyers belong to than they realize. A lot of first-time buyers think of themselves as cash-and-savings buyers because they have an injection put together, and they have not yet understood that the injection is the down payment and the SBA loan is the actual engine of the purchase. If you are an individual buying a lower-middle-market business and you are not a cash buyer for the whole thing, you are almost certainly an SBA-dependent buyer, whether or not that is how you have been picturing yourself. There is nothing wrong with being one. But it is the most structured and least flexible version of the search, because the financing rules are not up for negotiation, and they set the outer edges of what you can pursue before you have looked at anything.

Once I know which of these a buyer is, I work the numbers with them myself, before any lender is in the room. I am doing three things in that conversation. I am sizing the realistic purchase-price range off their injection and their income, which is usually narrower than the range they walked in imagining. I am stress-testing whether the deal they have in their head can actually carry its own debt, because a business has to service the loan that buys it out of its own cash flow, and plenty of attractive-looking businesses cannot support the price the buyer wants to pay for them. And I am finding out whether the buyer’s expectation and the buyer’s capacity are in the same universe, which is the single most useful thing I can learn early, because when they are not, everything downstream is wasted motion until we fix it.

I do this before bringing in a lender on purpose, because a lender’s job is to underwrite a specific deal, and my job is to tell a buyer whether they are ready to be shopping for one at all. Those are different questions, and the second one is cheaper to answer at my desk than at a bank’s.

When a buyer does need SBA financing, I do not hand them to a single bank. I make multiple introductions, because SBA lenders are not interchangeable. They have different credit appetites, different levels of comfort with particular industries, and very different speed, and a buyer is far better served by having more than one of them look at the profile than by being captive to the first bank that says maybe. The buyer who has two or three lenders interested has options on terms and a fallback if one of them slows down or backs away late, which happens. The buyer who has one has a single point of failure sitting right in the middle of their deal.

None of this is the exciting part of buying a business, and buyers rarely arrive wanting to talk about it. But the financing question is not a detail that gets sorted out once the right business appears. It is the thing that decides which businesses are even worth your attention, and getting honest about it at the start is what keeps a search from becoming a year of looking at companies you were never in a position to buy.

A note for the CPAs who refer clients to me

When a client of yours starts talking about buying a business, the category question in this piece is one you are well positioned to help answer, because you already know whether they are truly a cash buyer, what their real income picture looks like, and whether the injection they have assembled is going to hold up once the tax cost of getting to that cash is accounted for. The individual buyers who misjudge their own type usually do it because nobody who knew their full financial picture told them otherwise. Bringing me in early, alongside the work you already do, means the buyer walks into the search classified correctly and sized realistically, and it keeps you in the seat on the entity and structuring decisions that follow once a real deal is in front of them.

A note for the wealth advisors

The buyer’s injection often comes, in whole or in part, from assets you manage, and that makes the funding conversation one you have a direct stake in. A client pulling from a brokerage account, a retirement account, or a home equity line to fund an acquisition is making a decision that reshapes the portfolio you have built with them, and it deserves to be planned rather than executed under deal pressure at the last minute. When a client of yours is heading toward a purchase, being in the conversation early lets you shape which assets fund the injection and how, protect the parts of the plan that should not be disturbed, and stay central to the household’s financial picture as it moves from an investment base toward an operating business and, over time, back toward a larger one. That is easier to do before the deal is moving than after.