Transcript
This memo splits it into five stages, each with a gate that can end the deal. Think of it as the home inspection, the test drive, and the title search, all at once for a business. Add-backs costs added back to profit. Expenses the seller adds back to profit to show higher earnings. Some are fair. The owner's salary, a genuinely one-time legal bill. Some are games. One-time costs that recur every year, or family working unpaid.
Rule on this page, add-backs over 30 to 35% of SDE, or any add-back with no receipt or payroll proof, is a red flag. Proof of cash, three-way number check. Making three sets of numbers tell the same story. The profit and loss statement, the business tax return, and the bank deposits. Real revenue shows up in all three. Plain read, cash the tax return does not show counts as zero for your price and for the lender.
If the three disagree, the lowest number is the real one. Quality of earnings. Quality of earnings, a professional check of whether the profit is real and repeatable. A CPA rebuilds the earnings from source documents instead of trusting the seller's spreadsheet. On this page, under $1 million, a self-done proof of cash plus a CPA recast is proportionate. At $1 million in up, or whenever the numbers wobble, a formal quality of earnings earns its fee.
The ESCR debt service coverage ratio, how many times the business's cash flow covers the loan payments each year.
It is the lender's main safety gauge. Example, $350,000 of cash flow against $200,000 of yearly payments is 1.75 times. The SBA floor for first-time buyers is 1.25 times, and this buy box targets 1.35 times or better for cushion. TTM trailing 12 months, the most recent 12 months of results, rather than the last calendar year. Listings quote TTM revenue and profit because it is the freshest full year available. Watch for a strong recent quarter propping up a declining TTM trend.
Ask for the month-by-month view. APA asset purchase agreement, the final contract that actually buys the business. It lists exactly what you get, what the seller promises, and what happens if a promise turns out to be false. Read, the LOI is the handshake on terms, the APA is the law of the deal. Your attorney reviews both. Hold back, part of the price held back on purpose.
A slice of the price, typically 5-10%, stays in escrow for 6-12 months after closing. If the seller's numbers were rosy or hidden problem surfaces, you have something to claim against. On this page, required on any deal with customer concentration or soft spot in verification. Earn out, pay later. If it performs, part of the price paid after closing, only if the business hits agreed results. Sellers use it to bridge a gap when they believe the future is brighter than the buyer will pay for today.
On this page, mentioned as a negotiated tool in broker deals. This buy box prefers a hold back, which protects you instead of betting on the future. Seller note, standby. The seller lends part of the price, seller financing. Instead of cash at closing, the seller takes payments over time. A standby note goes further.
The seller agrees to no payments at all until the bank loan allows, standing behind the bank in line. Why it matters? Under SBA rules, a full standby seller note can count toward your 10% equity injection. At least 5% still has to be your own cash. Equity injection, your down payment in SBA language, the buyer's own money into the deal. For a complete change of ownership, the SBA requires at least 10% of the total project cost.
New since October 1st, 2026, for first time buyers, that 10% cannot be reduced or waived. SOP 5010, 8.1. The SBA's current loan rule book, SOP, means standard operating procedure. The SBA's own manual that lenders must follow. Version 8.1 took effect October 1st, 2026, and added the stricter first time buyer rules in section 06 of this memo. Plain read, when a guide online quotes older SBA rules, it is probably reading an older SOP.
The version number is how you tell. Underwriting the lender's yes or no process, the bank rebuilds the deal from tax returns, bank statements, and the valuation, then decides. It runs on historical numbers only, never on projections for first time buyers. Plain read, nothing is approved until underwriting says so, whatever a broker or a pre-qualified label promised. Enterprise value, the value of the whole business, the price of the business itself, before the buyers and sellers' debts get sorted out.
Market stats, like BizbuyCell's $7.95 billion of 2025 deals, are quoted in enterprise value.
Plain read, for deals at this size, treat it as the sale price of the business. What you personally owe the bank is a separate question. P&L, profit and loss statement. The scorecard, money in, money out, what is left, over a month or a year. Sellers present it, diligence tests it against tax returns and bank deposits. Plain read, the P&L is the seller's version of the story.
The tax return and the bank account are the receipts. Working capital, peg. The everyday running money, the cash a business needs in the till to cover payroll, bills and stock between payments. The peg is the agreed amount that must be sitting in the business on closing day. On this page, stage four calls it gas in the tank. Without a peg, a seller can drain the accounts the week before you take over.
Reps and warranties. The seller's promises in writing, statements in the purchase agreement such as, the books are accurate, the taxes are paid, no lawsuits are hiding, the licenses are real. If one turns out false, these clauses are how you get made whole. Paired with an indemnity cap and basket, meaning that most the seller can owe you and the small claims threshold before it kicks in.
Your attorney sets both. Escrow, a neutral party holds the money. Funds sit with a trusted third party until the agreed steps happen, then release. Digital marketplaces build escrow in. Main street deals use a closing attorney or escrow agent. Rule, never pay a seller directly around escrow, especially on Flippa.
Escrow is what makes a hold back real. Proof of funds, proof you have the money. A bank statement or a lender pre-qualification letter showing you can actually close. Brokers ask for it before releasing a CIM. And Empire Flippers will not unlock listings without it. Plain read, it is the seller's side running diligence on you.
Having it ready is part of looking like a serious buyer. Asset sale versus stock sale? Buying the things or buying the company. In an asset sale, you buy the equipment, the name, the customers, and the goodwill. And the seller's old debts and legal risks stay with the seller. In a stock sale, you buy the company itself, history included.
On this page, asset sale preferred. And a stock sale with undisclosed liabilities and no reps or hold back is a hard pass. Semi absentee, passive sideline owner versus no owner. Semi absentee means a manager runs the floor while you run the business. Money, strategy, and the manager at roughly 10 to 20 hours a week. Passive means the owner does essentially nothing.
Why the words matter? The SBA cannot lend to a passive business. Semi absentee with a real manager gets financed every week. Never pitch a lender the word passive.