The capital stack hierarchy — five layers of deal financing.

"How are you funding it?" is the question that separates a buyer with a thesis from a buyer with a deal. The answer is always a stack — a layered set of capital sources, each priced according to where it sits in line for repayment. The layer at the bottom is cheap because it gets paid first and is fully secured; the layer at the top is expensive because it gets paid last and absorbs the first losses. Assemble the stack well and the deal carries itself; assemble it badly and a good book becomes an unaffordable one.

§ 01 · The five layersBottom to top.

From the bottom up, the stack runs senior debt (most secured), mezzanine debt, seller financing, rollover equity, and buyer cash equity — and the ordering is also the repayment priority, which is why cost rises as you climb. Senior debt sub-$5M is dominated by SBA 7(a) loans: prime + 2.25–2.75% (≈8–10%), capped at $5M, sized at 2.5–4× combined EBITDA, with the agency guaranteeing 75–85% to the lender (which broadens approval) and a 10-year amortization that smooths debt service. Commercial agency lenders are the alternative — faster closings without SBA paperwork, sometimes higher leverage, at 7–12% (typically 1–3 points above SBA). Mezzanine debt runs 12–18% all-in (cash coupon plus equity upside) and rarely appears below $5M because the complexity isn't justified. Seller financing runs 5–8% — below senior-debt cost, because sellers accept below-market rates to facilitate the deal — at 20–40% of price over 3–7 years, often with offset rights against indemnification. The market backdrop that's currently widening the cash layer is in the 2026 market context.

§ 02 · The two equity layersRollover and buyer cash.

The top of the stack is equity, and it's expensive precisely because it's last in line. Rollover equity — the seller reinvesting part of their proceeds into the combined entity — sizes at 10–25% of purchase price in buyer-friendly structures and 30–50%+ in true partnership deals, and it's always paired with governance terms, tag-along and drag-along rights, and defined exit mechanics, because an equity holder with no governance and no liquidity path has rolled into a trap. Buyer cash equity is the buyer's own injection, typically 15–40% of deal size for individual-buyer agency deals, targeting a 20–30%+ IRR for sponsor-backed buyers and varying for individuals. These two layers absorb the first losses, which is the economic reason they command the highest returns. Seller financing offers the buyer four specific benefits worth naming: it reduces cash at closing, aligns the seller's incentives (the seller now cares about post-closing performance), enables indemnification offset against unpaid principal, and fills senior-debt capacity gaps without absorbing senior capacity. The seller-note mechanics behind that layer are detailed in promissory notes and stock pledges.

§ 03 · Three stack patternsHow sub-$5M deals assemble.

Most sub-$5M deals fall into one of three recognizable patterns. The simple stack — for an individual buyer acquiring a single agency — is roughly 50% SBA + 30% seller note + 20% buyer cash equity; a $2M deal might be $1M SBA, $600K seller note, $400K buyer equity. The leveraged stack — for an experienced buyer making multiple acquisitions — is around 60% commercial lender + 20% seller note + 10% rollover + 10% buyer cash; a $3M deal might be $1.8M lender, $600K seller note, $300K rollover, $300K buyer equity. The partnership stack — for a strategic acquirer wanting high seller continuity — is roughly 40% debt + 10% seller note + 30% rollover + 20% buyer cash; a $4M deal might be $1.6M debt, $400K seller note, $1.2M rollover, $800K buyer equity. The pattern you choose follows from who you are and what you're optimizing for — leverage, continuity, or simplicity — and each produces a different risk and return profile. The full menu of funding sources behind these layers is in acquisition funding strategies.

§ 04 · Why simpler usually winsThe sub-$5M reality.

The single most useful thing to internalize is that sub-$5M agency deals use only two to four layers, against the six or seven in institutional transactions — and that simplicity is a feature, not a limitation. Each additional layer adds cost, complexity, intercreditor negotiation, and another party whose interests have to be managed, and below $5M the value of that complexity rarely clears its cost (which is exactly why mezzanine debt almost never appears in this range). The discipline is to use the fewest layers that get the deal done at a cost of capital you can carry — most often senior debt, a seller note, and your own equity, with rollover added when seller alignment is worth paying for. Build the stack from the bottom up, respect the repayment priority that prices each layer, and keep it as shallow as the deal allows, and you've financed an acquisition you can actually service through its first hard quarter. The way these layers get sourced and covenanted is in acquisition funding strategies.

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