5. Diligence & Close the Deal

The Stage in Brief

Under LOI, two tracks run in parallel: confirmatory diligence (quality of earnings, legal, insurance, licenses) and financing (the SBA 7(a) process or investor equity, seller note structure, working capital planning). Deals die here more than anywhere else, usually from surprises a QoE would have caught earlier, or from depending on a single lender until the week it declines. The clock is the other adversary: exclusivity runs while third parties take their time, so a stage that starts disorganized finishes late, and the seller's patience is the one resource you cannot re-order.

Work the Diligence Checklist

Every diligence workstream as a working checklist, from LOI through closing week.

Where the Paths Diverge

Traditional: Investor approvals and equity documentation set the pace instead, and the equity has to be called before closing.
Self-Funded: The SBA process dominates the calendar, and the personal guarantee gets signed here.
Employed: The firm's investment committee is the gate, so the diligence file is written to convince it rather than a lender.

Questions to Answer Before Moving On

Does the quality-of-earnings work confirm what I think I'm buying?
Which lenders actually like this industry, size, and structure?
What's the seller note and rollover, and is any of it on standby for the lender?
What does day-one working capital actually require?
If I walk, what happens to my deposit, my diligence spend, and the clock?

Work here saves to your account and follows you across devices, so an account is what keeps it.

Mistakes That Cost Searchers Months

Skipping QoE to save $12k to $30k on a seven-figure purchase
Depending on a single lender until the week it falls through
Underestimating the timeline and exhausting the seller's patience
Letting exclusivity run out while a document nobody chased sits with a third party

What the Data Says

Sanity-check any term sheet against the market: SBA 7(a) acquisition loans priced at a median of Prime + 2.00% across the first two quarters of 2026 (about 9.0% at the 7.00% prime), and Q4 2025 government data put the average at 8.86% across 1,153 change-of-control loans.
Source: SBA 7(a) FOIA loan-level dataset (as of June 30, 2026)
The median SBA change-of-ownership loan ran about $775k in government data for the last quarter of 2025, against $700k for fiscal year 2025, so a much larger deal draws more lender scrutiny and often a combination structure. The single-loan 7(a) cap remains $5M, above which the financing stops being one clean loan.
Source: SBA 7(a) FOIA loan data
Which lender receives the file is itself a term. Across the 25 lenders that wrote the most change-of-ownership loans in FY2025, average initial rates over FY2020-25 run from 7.03% to 11.1%, though part of that gap is timing: the yearly average ran from 5.31% in FY2021 to 10.17% in FY2024. The two largest wrote about 22% of FY2025's loans between them.
Source: Acquisition Lending by State (SBA 7(a) FOIA league table)
The financing reduces to one ratio: the SBA requires 1.25x debt-service coverage to buy a business, so the business has to throw off $1.25 of cash for every $1 of payment, after paying you enough to live on. On the median $775k loan of 2025's last quarter, at its 8.86% average over ten years, that is about $12,200 a month.
Source: SBA Loan Statistics (SBA 7(a) FOIA, SOP 50 10 8.1 coverage floor)

The Playbook

Sequence the gauntlet on day one

The sixty-to-one-hundred-twenty days under LOI die by disorganization more than by discovery. Before the ink dries, build the calendar backward from close: QoE kickoff in week one, lender package the same week, legal drafting once QoE stabilizes, insurance and licenses in parallel. Every workstream that starts late finishes later, and seller patience is the one resource you cannot re-order.

Treat QoE as the price of admission

Quality of earnings is the diligence spend searchers regret skipping and almost never regret buying. It either confirms the earnings and arms your lender file, or it finds the problem while you can still renegotiate; findings routinely move price by multiples of the fee. Scope it to the deal's size, but scope it; a seven-figure purchase decided on unaudited statements is a bet, not a plan.

Run lenders in parallel, always

Single-lender dependence is the classic late-stage catastrophe: the week-nine credit-committee surprise with no fallback. Take the same clean package to two or three lenders who demonstrably do your deal type and size, let a broker create the competition if that's easier, and keep the runner-up warm until funding. Term sheets improve mysteriously when lenders know they aren't alone. Compare loan maturity beside the rate. A business-only 7(a) runs ten years, while a deal that includes the property usually blends the two, stretching the property's share toward twenty-five, and that difference moves the payment further than a quarter point ever will.

Structure to the current rules

Deal structure inherited from older guides fails modern underwriting. Seller notes counted toward your equity injection sit subordinated and on full standby for the life of the loan. Since October 2026 they share their half of the 10% with other standby debt and minority equity, which changes what sellers will accept and how your cash stretches. Model the structure at current pricing before the LOI locks terms, and have your lender bless it before your attorney drafts it.

Protect the seller relationship through the grind

Diligence feels adversarial to a founder watching a stranger audit their life's work. Over-communicate the calendar, batch your document requests, explain why each ask exists, and deliver bad news with a proposal attached. The seller who still likes you at closing trains you generously afterward; the one worn down by chaos does the minimum the contract requires.

Treat the close itself as mechanics

Once diligence clears and the lender commits, closing is process rather than drama: the purchase agreement and its schedules, the working-capital true-up, escrow and holdback, lien searches, and the funds flow. Keep a closing checklist so nothing stalls in the week between signed papers and wired money, and line up the day-one handoff before you sit at the table.

Tools for This Stage

Lenders

The verified lenders and loan brokers, a card each.

Deal Tools

The checklist, the math, and the terms.

Underwrite a Deal

One target, underwritten end to end.

LOI Terms Worksheet

Decide the terms before the template.

Diligence Checklist

Every diligence workstream, through to close.

Document Requests

Ask for it once, then track what arrives.

Scope the QoE

Price the earnings work, then the deal.

Reading the FDD

The layer a franchise resale adds.

Deal Resources

The advisors your closing actually hires.

What the Loan File Contains

What a lender asks for and what a no means.

Lenders Past the Cap

Bank desks lending on cash flow past the SBA limit.

SBA Acquisition Calculator

Which limits the deal: your cash or the earnings.

Deal Outreach Templates

Engaging advisors and running the workstreams.

Resources for This Stage

The Words This Stage Uses

Amortization

The schedule repaying a loan's principal, more with each payment.

DSCR (Debt Service Coverage Ratio)

Cash available for debt payments divided by the payments themselves.

Due diligence

The phase between LOI and closing where the price gets checked.

Escrow / holdback

Purchase money held at closing to cover claims that surface later.

Full standby

A seller note that receives no payments while the SBA loan runs.

Non-compete (seller)

The seller's promise not to start or join a rival, for a set time.

Prime rate

The benchmark most variable SBA loans are priced against, plus a spread.

Purchase agreement (APA/SPA)

The binding contract that governs the sale and any later dispute.

QoE (Quality of Earnings)

An accounting review that verifies the earnings you are paying for.

Reps & warranties

The seller's statements of fact, with indemnity if they prove false.

Retrade

Moving an agreed price after the LOI, either way, on a diligence finding.

Seller note

Part of the price the seller finances, repaid to them after closing.

Working capital

The cash the business runs on day to day: receivables and stock, less payables.

Working capital peg

The working capital the business must be delivered with at closing.

A selection of the words this stage uses. The rest are in the glossary.