Acquisition funding strategies — sourcing the capital.

Knowing the capital stack tells you what layers exist; funding strategy tells you how to actually source them and what they cost in covenants and constraints. This is where deals quietly fail — not at the negotiating table, but in month four, when carrier commissions are still routing through the seller's old account, working capital is gone, and there was never a reserve for the gap. Sourcing capital well means funding more than the price, and funding it in a structure you can service.

§ 01 · Five funding sourcesThe menu.

Five primary sources fund an agency acquisition: a buyer equity injection (10–30%), senior debt (an SBA 7(a) loan sub-$5M, commercial lending above), seller financing (10–30%), earnouts (10–30%), and rollover equity (20–40%+ on PE-backed deals). Whatever the mix, deals close cash-free, debt-free: the seller retains the business cash and pays off all business debt — payroll-tax and trust shortfalls, carrier payables, pre-close E&O — and the buyer wires the net proceeds. Every LOI should reference this explicitly, because a buyer who assumes otherwise can inherit liabilities that weren't priced. The layered structure these sources fill is detailed in the capital stack hierarchy.

§ 02 · Fund more than the priceThe total capital need.

The most expensive mistake in agency acquisition isn't overpaying — it's under-capitalizing. The total capital need is the purchase price plus three things buyers routinely forget: working capital (2–4% of annual revenue, covering 60–90 days), closing costs (1–3% of the purchase price), and an integration reserve (1–2% of the purchase price). A $3M deal therefore needs roughly $3.15–3.35M deployed, not $3M — and the buyer who funds exactly the price discovers the gap in month four, when carrier commissions are still routing through the seller's old account and there's no cushion to bridge it. Under-capitalization is the number-one first-time failure mode precisely because it's invisible at closing and fatal a quarter later. Funding the whole need, not just the headline, is the first discipline of sourcing capital.

§ 03 · The SBA 7(a) workhorseAnd the standby trap.

For sub-$5M deals, the SBA 7(a) loan does the heavy lifting: a $5M maximum, amortization up to 10 years, a 10% minimum equity injection (5% of which can come from a seller standby note), interest around prime + 2.25–2.75% (~9.75–11.25% in 2026), and a personal guarantee from any 20%+ owner. But there's a trap in the fine print: if the buyer injects only the 10% minimum equity, the SBA often requires the seller note on full standby — no principal or interest payments for the life of the loan, up to 10 years — which means that portion functions economically as equity, not debt. That changes the seller's calculus entirely, and a buyer who promises a seller note without flagging the standby risk is setting up a dispute. A common workaround is the dual-note strategy: a standby note (≤5% of price, on full standby, counting toward the 10% SBA equity requirement) paired with a servicing note (10–20% of price, regular monthly principal and interest, subordinated but not on full standby). Commercial and specialty lending takes over above $5M — 60–75% loan-to-value, a debt-service-coverage covenant of at least 1.25×, total-debt-to-EBITDA capped around 3.0–4.5×, and a first lien on all business assets. The seller note's own security and offset terms are detailed in promissory notes and stock pledges.

§ 04 · Subordination and the coverage floorWhat keeps you solvent.

When senior debt and a seller note coexist, a subordination agreement governs how they interact, and three terms carry the weight. The standstill period (180–365 days) bars the seller from suing, foreclosing, or accelerating if the buyer defaults on the senior loan — a longer standstill benefits the buyer. Payment blockage lets the senior lender freeze payments to the seller on a covenant breach — negotiate a "permitted payments" carve-out that preserves current interest during non-material breaches. And the second-lien option — sellers may demand one, and buyers resist if the senior lender allows. Underneath all of it sits the number that decides survivability: the debt-service coverage ratio. A 1.25× DSCR is the typical commercial-lender minimum; 1.35–1.50× gives a healthy buyer margin; below 1.15×, a single bad quarter breaches a covenant. Source the full capital need, structure the SBA note knowing the standby trap, negotiate the subordination terms, and hold coverage above 1.25× — do those four things and you've funded a deal that survives its first hard quarter instead of dying in it. The market context shaping today's rates and structures is in the 2026 market context.

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