“I buy companies with a mix of debt and equity”
There are many ways to skin a cat. There are also many ways to structure a deal.
Let’s talk about what are some of the creative ways to structure deals. This is both applicable to SMBs and real estate alike. There are a lot of overlap in the way to structure deals.
A lot of SMB owners also own real estate on the side so these general structures are a good intro for how to structure a deal.
Me, personally, have only bought real estate but have a lot of friends that buy businesses and real estate.
The big idea: every deal - building or business - is funded the same way. A mix of financial structures.
Senior debt at the bottom (cheap, secured, gets paid first)
Mezzanine / seller financing in the middle (more expensive, fills the gap)
Equity on top (your cash, last in line, biggest upside)
Real estate calls it the "capital stack." SMB world calls it the "deal structure." Identical.
Quick Intro
With the capital stack, it’s important to understand the liquidity preferences. When you often borrow money, the borrower has to pay the lender back first. Sometimes, you can have another lender come in a junior position so you can borrow even more money and come up with less cash out of pocket.
Senior Debt:
Senior debt is traditionally funded by banks and traditional lending institutions. It’s the first part of the capital stack.
Real estate side:
Conventional / agency loans (Fannie, Freddie) - 75-80% LTV, 6-7% rates
DSCR loans - qualifies on the property's cash flow, not your W-2
CMBS / commercial bank debt for bigger deals
SMB side:
SBA 7(a) - up to 90% leverage, the "how normal people buy businesses" loan
SBA 504 - the play when you're buying the business AND the building
Conventional bank loans (rare, usually for the big deals)
The critical difference (call this out hard): real estate has non-recourse options. SBA debt is personally guaranteed, full stop. Your house is on the line. This is the trade-off nobody on TikTok mentions.
This means if the business fails, you might have to sell your possessions to pay that debt back. Be very careful if you’re going to buy a business because you may go bankrupt.
Seller Financing
This is when the seller “becomes the bank”. There’s no fixed method of seller financing. The beauty about seller financing is it’s an agreement between you and the seller and you can dictate whatever terms you would like.
Real estate side:
Seller notes - rare in residential, more common in CRE
Wraparound mortgages - keeping the existing low-rate loan in place
Subject-to deals - the buzzword version of the same idea where you take over payments for the existing loan.
SMB side:
Seller notes are the norm - 60-80% of small business deals have one
Typical structure: 10-20% of purchase price, 5-7 year term, 6-8% interest
Why sellers agree: tax spread, faster close, signals confidence
The takeaway: in both worlds, when the buyer's cash and the seller's price don't match, the seller bridges it themselves.
Worth saying out loud - this is good for the buyer because a seller note is a vote of confidence in the asset.
It also has a variety of tax benefits if the seller has owned the property/business for a long time.
Creative Structures
They say constraints breed creativity. Often times, a saying is “you pick the price, I pick the terms” when it comes to making deals. There is no one size fits all. A deal is an agreement between two people and you can make it as wild as you would like.
Real estate side:
Lease options - control without owning
Master lease agreements - operating before you close
JV equity partnerships - your operations, their money
SMB side:
Earnouts - "I'll pay you the rest if the business performs"
Equity rollover - seller stays in for 10-20%, aligns incentives
Holdco structures - one parent, multiple acquired businesses
Search funds - investors pre-fund your hunt
The pattern: in both worlds, when the price tag and the available cash don't match, structure fills the gap.
Creativity leads to leverage and with more constraints, you tend to get more creative.
Equity
Quick math comparison.
What does this look like in real life?
Let’s take an example what a $1M acquisition looks like. It depends on what you’re aiming for and what your life goals are.
A $1M small multifamily:
25% down = $250k cash
75% senior debt
Cash-on-cash if it nets $40k/yr = 16%
A $1M HVAC business via SBA 7(a):
10% down = $100k cash
10% seller note
80% SBA debt
Cash flow after debt service of $150k? That's 150% cash-on-cash. On paper.
The point isn't that one's better - it's that the leverage profiles are radically different. SMB financing is dramatically more leveraged, which means dramatically more risk and dramatically more return.
Make sure you understand what your risk profile is and if you’re willing to take that swing. There are trade offs and buying a business may not be the right solution if you have a high paying job.
Combination of both:
Buying the business AND the building, together. It’s oftentimes the best of both worlds as I mentioned earlier in the section that business owners are usually both.
The SBA 504 program is built for exactly this.
One acquisition, two cash flow streams
The business pays you operating income
The real estate appreciates AND collects rent (from yourself)
You can sell-leaseback the real estate later if you need capital
Tax benefit: triple-net lease your own real estate to your own business, depreciation flows to one entity, rent expense flows out of the other
This is your "1+1 = 3" close. The reason a real estate person should care about businesses, and vice versa.
A combination of buying a cash flow business and using the proceeds to buy real estate is NOT a new concept. This is honestly how real wealth is built.
This is what pays for the Ferraris and Rolls Royces you see on Instagram street interviews.
Personal Note:
I’ve been enjoying writing these and getting back out there. What other topics do you want to see?
-Mohit