How the note sets the price

Anchored to
$673,000 over 10 years at 7.75%

The shape of the median deal

Across 40,612 financed acquisitions, the median carried $673,000 of bank debt, at 7.75%, over 10 years. The middle half of deals ran $300,000 to $1,492,000. Those four numbers describe the financing reality of this part of the market better than any valuation framework.

The arithmetic a buyer runs

A buyer at this size is usually an individual, sometimes with a partner, occasionally a small firm. They are not modelling an internal rate of return over a five-year hold. They are asking one question: after the loan payment, is there enough left for me to live on and for the business to survive a bad quarter.

That question resolves into a coverage test. The lender wants the business's adjusted earnings to exceed the annual debt service by a comfortable margin, because the margin is what absorbs a bad year. The buyer wants what remains after that margin to be a reasonable income for running the company full time. Both constraints bite on the same number, and neither of them is a multiple.

Work it in the direction the buyer works it. Start from adjusted earnings, subtract a market salary for whoever will actually run the business, keep back a coverage cushion, and what is left is the maximum annual payment. A payment supports a principal amount that depends on the rate and the term. That principal, plus whatever equity and seller paper the buyer can add, is the price. The multiple is an output of that calculation, discovered afterwards, not an input.

Why this behaves as a ceiling

A seller can always find someone who agrees the business is worth more. What they cannot do is make that person's bank agree. If the resulting note fails the coverage test, the loan is not approved, and a buyer without financing is not a buyer.

The exception is a buyer who does not need the debt. Strategic acquirers already in the industry, or buyers with capital behind them, are not bound by the coverage test in the same way and can pay more for reasons of their own. Reaching those buyers rather than only the ones who walk in is a large part of what a sale process is for.

What happens when rates move

Most 7(a) acquisition paper is variable, priced over a published base rate. When the base rate rises, the payment on a given principal rises with it, the coverage test tightens, and the principal a given business can support falls. Nothing about the business has changed. The price it can command has.

This is why sale prices in this part of the market track credit conditions more closely than owners expect, and why timing a sale is partly a question about the cost of money rather than about the company.

What it means for a seller

Three practical consequences. First, anything that raises defensible adjusted earnings raises the ceiling directly, which is why the quality of earnings work pays for itself more reliably than any negotiating tactic. Second, structure can lift a price the bank alone will not support, most often through a seller note, at the cost of the seller carrying risk after closing. Third, the published multiples circulating online are drawn from a completely different population and do not apply here, for reasons set out on the multiples page.