The ETA Capital Stack: Equity, Mezzanine, SBA, Seller Financing
Most ETA acquisitions use a multi-source capital stack. Here is how each layer works, what the trade-offs are, and how I think about which mix fits which deal.
A typical ETA acquisition uses a layered capital stack. Each layer comes with different rights, different costs, and different effects on the operator's flexibility post-close. The right mix depends on the deal economics, the operator's risk tolerance, and what they want the post-close period to feel like.
Layer one: equity
The equity is the foundation. It comes from the operator's own capital, from co-investors (LPs in a search fund, individual angels, or strategic operators putting in checks), and sometimes from family-and-friends capital.
Equity has two roles. It demonstrates skin in the game to the lenders. And it provides the cushion that absorbs the first losses if the business underperforms. The right amount of equity depends on the cash flow profile of the business and the lender requirements, but it is rarely below twenty percent of the purchase price for SBA-financed deals.
Layer two: SBA financing
For deals up to five million in total enterprise value, SBA 7(a) financing is the dominant tool. Amortization periods of ten years for asset-based deals or twenty-five years if real estate is involved. Personal guarantee from the principal. Documentation-heavy, but the cost of capital is genuinely attractive for the asset class.
SBA financing comes with constraints. The lender will have requirements on debt-to-EBITDA ratios, working capital coverage, and personal guarantees that limit the operator's flexibility. The trade-off is real and often worth it.
Layer three: seller financing
Seller financing is the layer that often gets under-used. The seller takes back a note for a portion of the purchase price, subordinated to the SBA debt, with interest and a defined amortization schedule.
The seller note does three things. It reduces the upfront equity check the operator has to write. It signals to the SBA lender that the seller has confidence in the post-close success, often improving loan terms. And it gives the seller a continuing financial interest in the business, which aligns their behavior during the transition period.
Most deals I structure include seller financing. Sellers who refuse it are sending a signal worth paying attention to.
Layer four: mezzanine or unitranche debt
For larger deals where the SBA cap is constraining, mezzanine debt can fill the gap between the senior debt and the equity. The cost of capital is significantly higher than SBA debt, often in the low double digits, and the covenants are tighter.
I avoid mezz unless the deal economics genuinely require it. The cost of capital changes the operating decisions the operator can make in ways that often hurt the long-term outcome.
The mix that works for most deals
For an SMB acquisition with one to two million of EBITDA at a four-to-five times multiple, my preferred mix is roughly thirty percent equity, fifty percent SBA, and twenty percent seller financing. The numbers move based on the specific deal, but that anchor produces a manageable debt service load and meaningful operating flexibility post-close.
What the wrong mix does
A capital stack that is too heavy on debt produces a debt service load that constrains the operating decisions the operator can make in the first three years, which is exactly when the operator should be investing in the business. A capital stack that is too heavy on equity is over-conservative and gives up returns to LPs that disciplined leverage would have produced.
The right capital stack is the one that lets the operator focus on the business instead of the debt service.
Written by Ramy Stephanos, SFAdvisor - Capital.