You buy a business in seven steps: set criteria and a budget, build enough deal flow to have real choice, screen and value what fits, sign a letter of intent, run diligence, arrange financing, then close and take over the relationships. The steps are the same for a small business or a lower middle market company. Only the scale changes.
Most first-time buyers get the order backwards. They find one business, fall for it, and reverse-engineer a rationale. The buyers who do well spend their effort earlier, on the part nobody writes guides about: seeing enough deals that walking away from any single one costs them nothing.
Small business or lower middle market: know which one you are buying
The steps below apply to both, but four things change with size, and it helps to know which side of the line you are on before you start.
How earnings are measured. A small, owner-run business is usually priced on seller's discretionary earnings, which adds the owner's salary and perks back to profit on the assumption that you will be doing that job. A lower middle market company is priced on EBITDA, with a market-rate management team already expensed. Comparing a multiple of one to a multiple of the other is the most common valuation mistake first-time buyers make.
Who you are dealing with. Small businesses are typically listed by business brokers, often on public listing sites. Larger companies run through M&A advisors, who distribute a deal selectively to a shortlist of buyers rather than posting it. If you are searching for the second kind, waiting for it to appear on a listing site does not work.
How it gets financed. Individual buyers of small businesses lean on SBA-backed debt and seller notes. Larger deals bring in conventional bank debt, mezzanine lenders, or investor equity, and the lender will want to see a management plan that does not depend on you personally.
What you are really buying. In a small business you are often buying the owner's job, plus their customer relationships. In a lower middle market company you are buying a system that runs without any one person. The diligence questions in step five are weighted differently as a result.
Step 1: Decide what you are actually buying
Write it down before you look at a single listing. Industry, revenue and earnings range, geography, and the structure you can live with. Be specific enough that someone else could screen a business against your criteria without calling you.
This sounds like a formality. It is the thing that saves you six months. Without written criteria, every business looks interesting on a Tuesday and terrible on a Thursday, and you will spend your attention on whatever arrived most recently rather than on what fits.
Be honest in the same document about two constraints. How much cash you can actually put in, and what you are able to run. A business that needs a licensed operator, or an owner who is also the top salesperson, is a different purchase from one with a management layer already in place.
Step 2: Build deal flow before you need it
This is where most searches stall. A buyer watching two or three listing sites is seeing a narrow slice of what is actually changing hands, and competing with everyone else watching the same sites.
Businesses change hands through three channels. On-market is what gets publicly listed. Pre-market is what advisors know is coming before it launches. Off-market is owners who have not started a process at all and may not for another year. Fewer than 20% of broker-listed deals ever reach the buyers who would actually want them, which is why single-channel searching feels so thin.
Working all three means direct outreach to owners, relationships with intermediaries in your target market, and a system for tracking the ones who say "not yet." Most lower middle market deals fail on timing rather than fit. The buyer who is still in touch eighteen months later is the one who gets the call.
If you would rather not build that infrastructure from scratch, how deal coverage works for acquirers walks through the same three channels from the mandate side.
Step 3: Screen fast, value slowly
Screening and valuing are different jobs and should take different amounts of your time.
Screening is a fast no. Does it fit the criteria from step one, is the asking price within range, and is there an obvious disqualifier in the first conversation? Most opportunities should die here, in minutes, without guilt.
Valuation starts on the few that survive. Small businesses are usually priced as a multiple of seller's discretionary earnings or EBITDA, with the multiple driven by things you can assess before diligence: customer concentration, recurring versus project revenue, how much of the business depends on the owner personally, and whether the industry is growing. Two businesses with identical earnings can be worth meaningfully different amounts for those reasons alone.
Use more than one method and expect them to disagree. The gap between an earnings multiple and an asset-based figure is information about what you are really buying.
Step 4: The letter of intent
The LOI sets price, deal structure, and how long you have exclusivity to complete diligence. It is mostly non-binding, which leads buyers to treat it casually. That is a mistake, because it anchors every negotiation that follows.
Settle the things that are expensive to reopen: the price and how it is calculated, whether it is an asset or a stock purchase, what happens to working capital at closing, and what the seller's role looks like afterward. Get the exclusivity period long enough to finish diligence and financing without having to ask for an extension from a position of weakness.
Two of those deserve their own paragraph, because they are where LOIs most often get renegotiated.
Asset purchase or stock purchase. In an asset deal you buy the assets you name and assume only the liabilities you agree to, which is why most small business acquisitions are done that way. In a stock deal you buy the entity, so contracts, licenses, and the operating history carry over intact, and so does every liability, known or not. The seller often prefers the structure you do not, because the tax treatment runs in opposite directions. Decide this with your attorney and accountant before the LOI, not after, because the price means something different under each.
Working capital at closing. A business needs a normal level of receivables, inventory, and payables to keep running on the day after you take over. If the LOI is silent on it, the seller can collect the receivables and run the inventory down before closing and hand you a business that needs cash on day one. Agree on a target level, usually a trailing average, and how any shortfall or excess adjusts the price.
Have your attorney read it before you sign. An LOI is cheap to get right and costly to renegotiate.
Step 5: Diligence is where the price gets tested
Diligence is not a document review. It is verifying that the business you were shown is the business that exists.
Start with quality of earnings. Reconcile reported profit to bank statements and tax returns, and interrogate every add-back — the personal expenses, the one-time costs that turn out to recur, the owner's compensation adjustment. Reported EBITDA and defensible EBITDA are often different numbers.
Then look at concentration and durability. Who are the top customers, what share of revenue do they represent, are they under contract, and would they stay through a change of ownership? Ask the same of key employees and suppliers.
Then look at the owner. How much of the revenue comes from their personal relationships, how many hours do they actually work, and what would it cost to replace them? This is the most commonly missed adjustment in small business acquisitions, because it does not appear on any statement.
Ask the questions that expose those three things early, in the first real conversation with the seller, before you have spent money on advisors. Why are you selling, and why now? What happens to the business if you take three weeks off? Who are your five largest customers and how long have they been with you? Which employees would you be worried about losing? Has anyone else looked at the business, and what happened? The answers are rarely disqualifying on their own. The hesitations are what you are listening for.
Legal and regulatory work runs alongside all of it — contracts, leases, licenses, litigation, and clean title to whatever you are acquiring. The legal and regulatory considerations when buying into a business go deeper on that piece.
Step 6: Financing
Most small business acquisitions are financed with a stack rather than a single source.
SBA 7(a) loans are the common path for individual buyers. The program caps at $5 million, and for a change of ownership the SBA requires a minimum equity injection of 10% of total project cost, some of which can come from a seller note held on standby. Underwriting is thorough and adds time, so start the conversation before you sign the LOI, not after.
Seller financing does more than close a funding gap. A seller carrying a note has an interest in the business performing after they leave, which is worth something beyond the money.
Conventional bank debt is available to buyers with collateral or an existing operating history, usually on faster timelines and tighter terms than the SBA.
Your own capital and outside investors fill the rest. Bring more working capital than the model says you need; the first months after closing are where optimistic assumptions go to be corrected.
Line up financing against the numbers diligence confirmed, not the numbers in the listing. If diligence moved earnings, it moved what a lender will lend. Our step-by-step guide to getting a loan to buy a business covers the application in more detail, and acquisition financing covers the structures.
Step 7: Close, then transition
Closing is document execution: purchase agreement, financing documents, escrow, and the transfer of assets, contracts, and licenses. Your attorney runs this.
The transition is the part that decides whether the purchase worked. Negotiate a real handover — introductions to the top customers and suppliers, time with key employees, and enough overlap that institutional knowledge transfers before the seller is gone. A short transition on a business that ran through its owner is how buyers lose revenue in the first year.
Why deals fall apart between the LOI and closing
Most buyers who lose a deal lose it in this window, and the causes repeat.
Diligence moved the number and nobody planned for it. Earnings that shrink under scrutiny should change the price, but a buyer who re-trades aggressively, or a seller who refuses to acknowledge the finding, ends the deal instead. Set expectations in the LOI for how a diligence adjustment will be handled.
Financing arrived late. A lender that sees the deal for the first time after the LOI is signed will need weeks the exclusivity period may not have. Start that conversation during screening, so the lender is confirming rather than starting.
A third party has a veto. Landlords who must consent to a lease assignment, franchisors who must approve a transfer, licensing bodies, and major customers with change-of-control clauses all get a say. Find every one of them during diligence and start the approvals early.
The seller changed their mind. It happens more than buyers expect, and it usually has more to do with the seller's life than the deal terms. Why owners back out of a sale at the last minute covers the patterns, and most of them can be read in the first conversation if you are listening for them.
None of this is a reason to skip diligence or rush. It is a reason to run financing, third-party approvals, and the seller relationship in parallel with the document work, rather than after it. How long it takes to acquire a business is a fair look at the calendar.
What separates the buyers who close
Three things, consistently.
Optionality. Buyers with several live conversations negotiate better than buyers with one, because they can walk. Overpaying is usually a symptom of a thin pipeline, not of bad negotiating.
Discipline about the criteria. The written document from step one is only useful if it survives contact with an interesting deal that does not fit.
Patience with timing. The right business is frequently owned by someone who is not ready to sell today. That is not a dead end unless you treat it as one.
Where to go from here
The search is the constraint, not the transaction. Deal flow for acquirers covers how coverage across off-market, pre-market, and on-market channels actually works, and acquisition financing covers the capital side. If you are still deciding whether to do this at all, is buying a business a good idea and the pros and cons of buying an existing business are the honest versions of that comparison.
