What is an acquisition equity Injection?

What is an equity injection? An equity injection represents the borrower and in a way the seller's "skin in the game" for an acquisition loan. It indicates the infusion of either cash or assets into a deal to reduce the leverage of an asset or equity purchase. This injection can come from the buyer as a cash down payment, or a seller can contribute equity by providing a promissory note for a portion of the purchase price. Equity injections can therefore be satisfied through the buyer's down payment, with a seller’s note, or in some combination.

Conventional loan down payment for an acquisition?

Equity Injection With Conventional Loans While a borrower’s personal financial situation and credit profile have influence, the primary equity injection criteria from conventional lenders focus on the Loan-to-Value (LTV) ratio. Typically, conventional lenders cap LTV at 75%, although some may extend to 85%.

For acquisitions, LTV is calculated by combining the value of the buyer's and seller's practices, resulting in most conventional acquisition deals meeting the LTV requirement. If a $1M value practice acquires a $1M value practice then $1M loan/$2M value = 50% LTV.

When a $333,000 value practice acquires $1M value practice then $1M/$1,333,000 = 75% LTV. In this case an equity injection (down payment and/or seller financing) is not required based on LTV but the lender may have other reasons they may want to see "some level" of injection (5%-10%).

Rule of thumb if both practices valued at same multiple, the buyer’s value needs to be at least 33% of the seller’s value (or visa-versa) to meet a 75% LTV.

What is the SBA equity injection about?

SBA Equity Injection Rules

SBA loans require a minimum 10% equity injection of total project costs for startups and change of ownership loans (acquiring a business, assets, or equity with 100% ownership transfer) unless exemptions apply.

Change of Ownership Loans:

Types: Include new business purchases, expansion acquisitions, and complete/partial partner buyouts.

Requirement: A 10% equity injection of total project costs (purchase price, fees, working capital), sourced from:

Cash: Paid by the borrower

Seller Note: Seller financing is allowed on full standby (no principal or interest payments for the entire loan term) can cover up to 50% of the injection.

Expansion acquisitions don't require a down payment?

Exception for Expansions: Business Expansion Loans do not require an equity injection. When an existing business starts or acquires a business that is in the same 6-digit NAICS code with identical ownership and in the same geographic area as the acquiring entity and they are co-borrowers, SBA considers this to be a business expansion and not a new business.

Expansion Acquisition: When an existing business purchases another established business.

There is no down payment requirement for one business purchasing another business if three conditions are met.

1 - The target business to purchase is in the same industry

2 - The target business to purchase is in the same geographical area as your current business

3 - The exact same current ownership structure will be applied to the purchased business.

If all three of these conditions are met then no equity injection is required. If all three conditions are not met, then the ten percent equity injection rules apply.

What about complete and partial parter buyouts?

Equity Injections for Partner Buyouts

Partner buyouts involve purchasing a partner’s equity, either fully or partially, with specific equity injection rules.

Partner Buyouts:

Complete: Purchasing 100% of a partner’s equity, transferring their full ownership to you.

Partial: Purchasing part of a partner’s equity, with the seller retaining some ownership.

Equity Injection: The lesser of:

• 10% of the purchase price.

• An amount ensuring a debt-to-worth ratio of 9:1 or lower on the pro forma balance sheet (based on the most recent fiscal year and quarter).

Exemption: No injection is required if:

The buyer has been an active operator and owned 10% or more of the business for at least 24 months, verified by both buyer and seller.

The business maintains a debt-to-worth ratio of 9:1 or lower (total debt ÷ total equity).

**Sources: **Must be paid in cash, seller notes for partner buyouts for the purposes of the equity injection are ineligible.

Guarantors: Post-sale, owners with 20%+ equity (including the seller, if retaining equity) must provide a personal guaranty. Sellers retaining less than 20% must guarantee the loan for 2 years post-disbursement.

Eligible Sources of Payment

Equity Injection Sources and Verification

Per SBA SOP 50 10 8 (effective June 1, 2025), equity injections for change of ownership loans must meet specific sourcing and verification requirements.

Acceptable Sources:

Savings: Personal savings (outside the acquired business’s balance sheet), verified by bank statements showing recent activity.

Liquidated Investments: Proceeds from sold stocks, bonds, or other assets, documented by investment account records or transaction statements.

Gifts: Funds from a third party (e.g., family), requiring a gift letter confirming no repayment obligation.

HELOC: Funds from a Home Equity Line of Credit, verified by loan statements.

Unacceptable Sources:

Funds from the acquired business’s existing balance sheet or borrowed funds (except HELOC or seller standby notes). Franchise fees do not count as the equity injection, even for startups; they’re included in total project costs (e.g., fees, equipment, working capital), but the 10% injection must be separate.

Project Costs Context:

The equity injection covers 10% of total project costs (e.g., purchase price, closing fees, working capital), not just a “down payment” toward the purchase price. Total project costs include all expenses required to complete the transaction, excluding lines of credit and 504 loans (Core Requirements, Paragraph D.2.a).

Verification:

Lenders require recent account statements (e.g., bank, investment, HELOC) to confirm the source’s legitimacy and availability. If funds come from multiple sources, each must be documented (e.g., separate statements for savings and HELOC). For gifts, a gift letter is mandatory. For non-cash assets, an independent appraisal is required. No fixed timeframe (e.g., two months) is mandated by SBA, but lenders typically request statements covering recent activity to ensure funds are accessible.

Process of Providing the Equity Injection:

Payment Method: Funds are typically wired to the lender or an escrow account 1–2 weeks before loan closing, ensuring availability for the transaction.

Documentation: Lenders require account statements, gift letters (for gifts, verifying no repayment), HELOC records, or seller standby agreements with subordination terms. Multiple sources require documentation for each (e.g., savings and investment statements).