How to buy a million dollar business: the numbers, worked through
Short answer
To buy a $1 million business with SBA financing, you'd typically need at least 10% of the total project as equity (around $106,000 if you finance $60,000 of costs and working capital), a lender-ordered valuation that supports the price, and earnings that cover the loan payments at least 1.25 times after paying yourself. In the worked example below, that means roughly $300,000 of verified SDE.
The arithmetic is simple; getting the earnings right is the hard part.
Seven figures is a common target for first-time buyers: big enough to pay a real salary and have staff, small enough for SBA financing and a manageable equity check. Here's how the money fits together.
Worked example
Illustrative example, not a real deal or current rates
Price $1,000,000. Financed closing costs and working capital $60,000. Total project $1,060,000.
| Sources | Amount | Notes |
|---|---|---|
| Buyer cash | $106,000 | Meets the 10% minimum on its own |
| Seller note, full standby | $50,000 | No payments during the SBA loan |
| SBA 7(a) loan | $904,000 | Example 10.5%, 10 years: ≈ $146,400/year |
| Total | $1,060,000 |
Coverage target: $146,400 × 1.25 ≈ $183,000 of cash available for debt. Add your $100,000 salary and a $15,000 capex reserve, and the business needs verified SDE of about $298,000. The price is about 3.4 times that SDE.
What could change the picture
- The lender's valuation comes in below $1,000,000: the gap is extra equity. See SBA business valuation.
- Verified SDE comes in below $298,000: coverage falls below 1.25, the loan shrinks. See add-backs.
- Rates are higher or lower than the example: payments change.
- A paying seller note instead of standby: more debt service, and it counts in the valuation cap.
Run your own version in the DSCR calculator.
Who sells million-dollar businesses, and why it matters
At this size, sellers are often founders who built the business over many years and are ready to retire, with a few employees, an established customer base and books kept by an outside accountant. That's good news for verification. The usual risks are owner dependence (the founder still holds the key relationships), deferred investment in equipment or systems in the years before sale, and working capital: a business with $2 million or more of revenue may need meaningful receivables and inventory to operate, which a headline price may or may not include. Ask early what's included, and plan your transition around the founder's relationships.
Deal structure options at this size
| Structure | Your cash | Watch for |
|---|---|---|
| SBA loan + your 10% | About $106,000 on a $1,060,000 project | Personal guarantee; 1.25 coverage |
| SBA loan + 5% cash + 5% standby seller note | About $53,000 | Seller gets nothing on the note for years; limited sources capped at half the injection |
| SBA loan + more equity | Above $106,000 | Lower debt service, more of your money at risk |
| Conventional loan + seller note | Often more | Shorter terms, different collateral rules |
Illustrative structures; lenders apply the SOP and their own policies.
What a lender will ask you for
At this size, SBA lenders look at the buyer as closely as the business. Expect to provide:
- A personal financial statement (SBA Form 413) and proof of the cash you're injecting, with its source.
- Three years of personal tax returns and a résumé showing relevant management experience.
- The business's three most recent years of tax returns, interim financials and the prior-year comparable interim, plus authorization for IRS transcripts.
- The signed LOI or purchase agreement, the lease (or a letter from the landlord) and any franchise agreement.
- A short business plan explaining how you'll run the business, including who replaces the seller's role.
- Any seller note terms, on SBA Form 155 if it's on full standby.
Worked example: the same deal at a higher interest rate
Illustrative example continued, not current rates
The $904,000 loan above costs about $146,400 a year at an example 10.5% over 10 years. At 12%, the payment rises to about $155,600. Required cash for debt at 1.25 coverage goes from about $183,000 to about $194,500, so with your $100,000 salary and $15,000 capex reserve the business needs about $309,500 of verified SDE instead of $298,000. Most SBA 7(a) loans have variable rates tied to a base rate, so test your deal at a higher rate before you sign, not after a rate increase arrives.
Questions to ask the seller of a seven-figure business
- What does your management team do without you, and who would run the business day to day after the sale?
- Which customers, suppliers and staff would you call personal relationships?
- What were revenue and SDE in each of the last three years and the last twelve months?
- What capital spending is coming in the next two years?
- How much working capital does the business need in a normal month, and will it be delivered at closing?
- Would you consider a standby seller note as part of the structure?
Advisers worth paying for at this size
A $1 million purchase usually justifies a business attorney experienced in acquisitions (LOI, purchase agreement, lease, entity), a CPA who has done buy-side reviews (earnings check, tax structure, price allocation), and an insurance broker. Depending on the industry, add an equipment appraiser, an environmental consultant, or a specialist for licences or healthcare billing. Diligence report costs the SBA requires can count toward your equity injection; other advisers' fees generally come from your own pocket or are financed as closing costs. Budget for them from the start, and spend most of it on the risks that matter most in your deal.
Red flags at this deal size
- SDE that only reaches the required level with shaky add-backs. Rate each one.
- An owner doing two jobs (for example, general manager and lead salesperson) that you'd have to fill with two salaries.
- Revenue concentrated in one or two customers.
- Working capital not included in the price, leaving you to fund receivables and inventory from your reserve.
- No room for a rate rise in the coverage math.
Diligence that scales with the price
At seven figures, the diligence budget grows, and so does the list. Expect to cover the following, in addition to the basics:
- A quality of earnings report if the purchase price is $3 million or more on an SBA Initial Acquisition or Business Expansion, where the SOP requires one. Below that, many buyers commission one anyway.
- Customer interviews with the largest accounts, arranged with the seller late in diligence.
- Management interviews with the people who will run the business with you, and their compensation and retention terms.
- Insurance review: claims history and the cost of coverage under your ownership.
- Legal review of contracts, litigation, employment practices and regulatory compliance.
- IT and data: who controls systems, backups and security, and what it costs to separate from the seller.
Agree a diligence budget with yourself before you sign the LOI, and remember it is spent whether or not you close.
At this size, also ask whether the management team will stay, and what it would cost to replace each of them.
Frequently asked questions
How much cash do I need for a $1 million business?
With SBA financing, at least 10% of total project cost, of which at least half must come from unlimited sources like your own cash, plus a personal reserve. More if the valuation comes in below the price.
What earnings does a $1 million business need?
Enough to pay you, set aside capex, and cover debt at 1.25 or better. In the example on this page, about $300,000 of SDE. Your rate, salary and structure will change the answer.
Does a $1 million business need a QoE?
Not under SBA rules, which require a QoE at a Business Purchase Price of $3 million or more. A valuation is required for all SBA acquisitions.
Can I buy a $1 million business with no money?
Not with SBA financing; see our page on buying a million dollar business with no money.
Do I need a Quality of Earnings report for a $1 million business?
Not under SBA rules, which require a QoE for initial acquisitions and business expansions at a business purchase price of $3 million or more. Many buyers at $1 million still pay for targeted earnings work by a CPA, or check proof of cash and add-backs themselves, because the risks a QoE looks for exist at every size.
What earnings does a $1 million business need to support SBA financing?
It depends on the rate, term, your salary and capex, but in the example on this page, about $298,000 of verified SDE at an example 10.5% rate. Build it from the bottom up: debt service times 1.25, plus the salary you need, plus a capex reserve.
Sources
- SBA SOP 50 10 8.1, Appendix 15
- SBA Form 155: Standby creditor's agreement
- SBA Form 413: Personal financial statement
- SBA: 7(a) loans
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.