The Newcomer’s Guide to M&A, Part 4
Capital with a Cause: How to Fund a Mission-Driven Deal
You’ve found a business that aligns with your mission. You’ve built trust with the seller, signed an LOI, and are ready to take the next step. But now you’re staring down the biggest question most first-time buyers ask:
How do I actually pay for this?
Good news: You’ve got options. And no, you don’t need a mountain of cash or a risky loan shark on speed dial.
In this post, we’ll walk through five common funding tools used in small business acquisitions: what they mean, when to use them, and how to start building a funding stack that reflects your values, risk tolerance, and long-term vision. Not just for profit, but for people and planet too.
Let’s Talk Capital
Funding an acquisition isn’t one-size-fits-all. Your deal structure should reflect what you care about—control, risk tolerance, mission alignment, and long-term impact—not just what’s most conventional.
Whether you’re trying to preserve legacy, protect your team, or reinvest in your values, the way you fund your deal will shape what’s possible post-close. So choose with care and with your cause in mind.
Debt Financing
Borrowed funds you repay over time—usually with interest—from banks, credit unions, or government-backed programs like the SBA.
Where to borrow:
Traditional banks or credit unions (for larger, low-risk borrowers)
Online lenders (faster but may come with higher interest)
SBA 7(a) loans (popular for small business acquisitions with lower down payments and longer terms)
Seller notes (a common form of seller financing) can sometimes function like debt if structured with interest and a formal repayment plan.
Pros:
You keep full ownership
Interest may be tax-deductible
Often cheaper than giving up equity
Cons:
Requires strong financials and/or collateral
Slower approval process (especially SBA)
You’re personally liable for repayment in most cases
Best for: Buyers with good credit, solid business plans, and a target company with consistent cash flow.
💡Real-World Example: $10M Acquisition
Let’s say you’re buying a $10M business with $2M in EBITDA. You secure an SBA 7(a) loan for $8M and cover the remaining $2M as your down payment. You now own the business outright and repay the loan monthly over 10 years, with interest.
Equity Financing
You raise money from outside investors in exchange for partial ownership of the business.
Where to raise:
Friends & family – often the first stop for early-stage buyers
Angel investors – high-net-worth individuals interested in small business or impact deals
Private equity or mission-aligned funds – institutional partners with larger check sizes
Strategic partners – suppliers, customers, or industry experts who see value in the deal
Pros:
No repayment obligations
Brings in partners who can add strategic value
Reduces financial pressure early on
Cons:
You give up partial ownership and potentially some decision-making power
Takes time and effort to pitch and close
Investors may want specific exit terms
Best for: Buyers prioritizing growth or larger deals, or those open to collaborative ownership.
💡Real-World Example: $10M Acquisition
You raise $4M from two impact-aligned investors in exchange for 40% of the business. You contribute $6M of your own (or through other means) to meet the full $10M price. You now share ownership and key decisions with your new partners, but you didn’t have to take on debt.
Seller Financing
The seller agrees to finance a portion of the purchase price—you repay them over time, often with interest.
How it works:
Typically 10–30% of the deal
Structured with a promissory note (monthly payments over 3–5 years)
May include interest and/or balloon payments (a large lump-sum payment due at the end of the term instead of evenly spaced installments)
Why sellers do it:
Confidence in your ability to run the business
Desire for passive income
It can be a deal-sweetener or bridge financing gap
Pros:
Flexible terms, negotiated directly
Lowers your upfront capital needs
Keeps seller engaged post-close
Cons:
Still requires repayment
Not always enough on its own
May include covenants or performance conditions
Best for: Buyers building trust with a values-aligned seller and seeking a smoother transition.
💡Real-World Example: $10M Acquisition
You and the seller agree that you’ll pay $7M upfront and finance the remaining $3M over five years. You sign a promissory note and send monthly payments with interest directly to the seller. It helps bridge your funding gap and keeps the seller engaged in your success post-close.
Self-Funding
You use personal savings, retirement accounts (e.g. ROBS), or other liquid assets to fund the acquisition.
Typical sources:
Cash savings
Rollover as Business Startups (ROBS) – a financing structure that lets you use retirement funds (like a 401(k) or IRA) without early withdrawal penalties or taxes by investing them into a new business you control.
Home equity lines or personal loans – riskier, but sometimes used for smaller deals
Pros:
Quick and flexible—no outside approvals
You keep 100% of the equity
No interest or repayment obligations
Cons:
High personal financial risk
Limits liquidity for operating capital
May constrain the size or scope of the deal
Best for: Smaller deals, solo buyers, or those confident in their personal runway.
💡Real-World Example: $10M Acquisition
You use $5M from your savings and retirement accounts (via a ROBS structure) and take a $5M home equity line to fund the full $10M purchase. You now own 100% of the business with no outside investors, but you’ve taken on significant personal financial risk. This structure gives you speed and full control.
Earn-Outs
A portion of the purchase price is paid later if the business meets specific performance goals.
How it works:
Seller receives additional payments based on post-close metrics (e.g., revenue, profit)
Often structured over 1–3 years
Can help bridge gaps in valuation
Why use them:
Keeps seller engaged and motivated
Aligns both parties on success
Defers part of the purchase price
Pros:
Reduces initial capital needed
Adds accountability and alignment
Helps mitigate risk in uncertain markets
Cons:
Can be complex and contentious if targets aren’t hit
Requires clear definitions and good tracking
Risk of tension if expectations aren’t met
Best for: Deals with strong future potential —like those with new product lines, big partnerships on the horizon, or room to scale— or when buyer and seller disagree on valuation.
💡Real-World Example: $10M Acquisition
You agree to pay $8M upfront and the final $2M only if the business hits specific growth targets in the next 2 years. If it performs as promised, the seller gets the rest; if not, you keep that $2M. This approach reduces your upfront cost and ties the seller’s payout to future results.
Thinking Through Your Mix
There’s no universal formula, but your capital stack should reflect what matters most to you. Ask:
Do I want to preserve control and ownership to protect the mission?
→ Favor debt or self-funding.Am I okay sharing decision-making if it brings in values-aligned partners?
→ Consider equity, but choose wisely.Is the seller impact-oriented and aligned with my vision?
→ Seller financing or earn-outs can deepen that trust.Will this structure give me room to reinvest in people, planet, and growth with purpose? Or will it create short-term pressure to compromise?
You’re not just building a funding stack. You’re setting the tone for how this business grows from here.
The Best Deals Use a Mix
Most first-time buyers combine multiple methods—like an SBA loan with some seller financing and a small equity raise. It’s all about building a structure that works for your vision, team, and risk profile.
🧠 Pro tip: Investors and lenders don’t just evaluate the numbers. They assess your leadership, clarity of purpose, and integration plan. The more prepared you are, the more confident they’ll be, so don’t be afraid to get help. A good advisor can turn a confusing funding stack into a clear, values-aligned roadmap.
Before You Fund, Ask:
What’s my risk tolerance financially and emotionally?
What trade-offs am I willing to make around ownership or control?
Is this funding mix sustainable for the first 12–18 months post-close?
You don’t have to be an expert to build the right deal. You just need the right map, and a clear sense of what you stand for.
Up Next:
Post 5: Navigating Closing Documents & Legal Pitfalls
Launching Wednesday, July 16
We’ll walk you through the documents you’ll need, the red flags to watch for, and the language that matters (without the legalese headache).