Course 3: LBO & SBA Debt Modeling for Small Business Acquisitions
The financing decision
An acquisition can have a reasonable valuation and still be unfinanceable. Fees increase the required investment beyond the seller's price, principal amortization consumes cash, customer collection delays create liquidity needs, and program rules restrict instruments that work in conventional M&A. This course teaches how to evaluate those constraints together rather than use leverage as a shortcut to a higher projected return.
The six chapters form a textbook sequence from capital structure through program mechanics, transaction funding, debt schedules, coverage, seller financing, and a complete acquisition model. They combine narrative explanation, worked tables, explicit formulas, lender-red-flag callouts, and self-study questions with detailed numerical solutions. The final capstone asks the learner to make a financing recommendation supported by an auditable workbook.
Intended reader and prerequisites
The course is designed for a professional who understands financial statements and basic valuation but has not structured or underwritten an SMB acquisition. Complete Courses 1 and 2 first, or bring equivalent familiarity with EBITDA normalization, working capital, capital expenditure, unlevered cash flow, and linked financial statements. The material assumes spreadsheet competence but derives amortization and coverage calculations from first principles.
Allow approximately 25–31 hours for reading, reproducing schedules, solving problems, and completing the capstone. Use Excel, LibreOffice Calc, or another spreadsheet supporting payment, present-value, and return calculations. No paid CFI materials are required. This independent curriculum follows public financial-modeling topics and does not award a CFI or SBA credential.
Structural breakdown and navigation
| Module | Chapter | Central question | Practical work product | Suggested time |
|---|---|---|---|---|
| 1 | The SMB Capital Stack: Leverage Dynamics, Senior Debt, Mezzanine, and Equity | How does financing allocate cash, upside, and loss? | Capital-stack comparison and equity-return bridge | 3–4 hours |
| 2 | SBA 7(a) Mechanics: SOP Guidelines, Equity Injections, Standstill Notes, and Guarantee Fees | Which structures and funding sources satisfy the governing rules? | Dated policy register, injection analysis, and fee calculation | 4–5 hours |
| 3 | Sources & Uses of Funds: Purchase Price, Working Capital Injections, Rollover Equity, and Closing Fees | Is every economic and cash use actually funded? | Balanced funding, seller-proceeds, and cash-only schedules | 4–5 hours |
| 4 | Debt Amortization Schedules & The Debt Service Coverage Ratio (DSCR) Waterfall | What payments are due, and when does coverage fail? | Monthly amortization, annual CFADS, and exact stress thresholds | 5–6 hours |
| 5 | Seller Note Engineering: Full vs. Partial Standstill, Balloon Payments, and Earnout Structures | Does deferred consideration improve liquidity or merely move the problem? | Comparative note schedules and eligibility assessment | 4–5 hours |
| 6 | Course 3 Capstone: Complete LBO & Debt Model for Precision Valve & Actuator | Does the entire transaction justify financing and investment approval? | Complete LBO workbook and financing memorandum | 5–6 hours |
Learning outcomes
By completion, the learner should be able to explain why leverage magnifies both gains and losses, distinguish senior priority from collateral recovery, and identify how mezzanine debt, seller notes, and equity change contractual cash obligations. The learner should separate investment return from compensation for a working owner's labor and recognize personal guarantees as exposure beyond the modeled equity cheque.
The learner should be able to construct sources and uses that reconcile total economic funding, closing cash movements, seller proceeds, prepaid costs, and injection treatment. Purchase price, working-capital delivery, incremental NWC, and minimum bank cash should remain separate. A funding gap must be quantified rather than hidden in an unapproved revolver or a mislabeled equity source.
The learner should be able to calculate monthly principal and interest, aggregate annual service, reamortize after a rate reset, and reconcile the debt balance to an independent formula. That schedule should support cash taxes, the interest tax shield, operating cash flow, retained cash, and the exit payoff without double counting interest or principal.
The learner should also distinguish the applicable EBITDA-based acquisition DSC test from a separately defined cash-flow covenant. Revenue stress must account for variable versus fixed costs and a zero floor on cash taxes. The model should identify exact 1.25x, 1.15x, and 1.0x thresholds under the stated assumptions, not just show three rounded downside cases.
Finally, the learner should be able to compare seller financing structures through maturity, identify prohibited or unsupported terms, and calculate MOIC and IRR from actual modeled equity flows. A compelling return cannot replace proof of eligibility, repayment capacity, or liquidity.
Recurring case and calculation conventions
Precision Valve & Actuator is fictional. Its operating purchase price is $5 million, annual revenue is $8 million, and accepted normalized EBITDA is $1.4 million. Total project uses are $5.6 million, funded by $4 million senior debt, $400,000 seller standby debt, and $1.2 million cash equity. The price is not the same as the project budget or the loan amount.
All Course 3 monetary figures use actual US dollars, overriding the $000 convention used in some other courses. Keep formulas at full precision and round only displayed outputs. The base rate assumption is hypothetical Prime of 7.25% plus a negotiated 2.75% spread, producing 10% nominal annual interest. The variable-rate base scenario holds that rate constant, while separate reset examples examine higher payments.
Precision's seller note is non-interest-bearing and on full standby while the senior obligation remains outstanding under the stipulated documents. The capstone assumes no interim equity distributions; cash is retained and released at a Year 5 sale only under the stated payoff and cash-delivery assumptions. These choices prevent unsupported early-payment and distribution promises from inflating executable returns.
The buyer's CFADS deducts modeled cash taxes, maintenance CapEx, and annual incremental NWC from EBITDA. The case additionally assumes a lender CFADS covenant of 1.25x. This covenant is distinct from the current SBA Initial Acquisition EBITDA-based DSC framework. The chapters report both definitions explicitly.
Policy date and primary-source framework
The policy snapshot is November 5, 2026. The current SOP publication page identifies SOP 50 10 8.1 with Technical Updates, effective October 1, 2026. Appendix 15 controls the acquisition-specific discussion, while Section A addresses core matters including guarantees and insurance. The SBA lender resource page supplies the published variable-rate ceiling context, and the FY 2027 fee notice supports the dated fee example.
The course does not repeat older two-year seller-standby conventions as current injection rules. It distinguishes qualifying full-term standby from partial deferral, recognizes the shared limited-source injection cap, and identifies current seller-earnout prohibition. Conventional rollover and earnout examples teach mechanics and recognition; they are explicitly outside Precision's complete SBA Initial Acquisition base structure.
For an actual deal, confirm the governing effective-date provisions, borrower and ownership eligibility, historical evidence, valuation, QoE, fee treatment, guarantees, insurance assignment, and final lender documents. An illustrative quote or successful spreadsheet calculation is not a loan commitment. See Sources and CFI Alignment for the broader attribution and verification approach.
Assessment and completion
Reproduce the debt schedule before attempting the capstone. Explain every cash movement in words: why interest changes taxable income, why principal does not reduce operating earnings, why growing inventory can consume cash, and why retained cash cannot also be an interim distribution. Maintain a policy register alongside the financial assumptions so a change in terms prompts the correct model revision.
The capstone uses a 100-point rubric covering funding, debt and taxes, cash coverage, returns, and decision quality. A passing self-assessment requires 80/100 and no critical error: an unfunded use, hidden senior balloon, duplicated payment, ineligible earnout in the SBA case, or undisclosed covenant breach. A well-supported recommendation to restructure or decline can earn full credit.
Course 2 overview · Begin Module 1 · Course 4 overview
Construction resources and completion
Use the learner workbook, student assignments and graded capstone packet. Compare only after completing your attempt with the instructor workbook and capstone solution.
- Complete all six independent module assignments.
- Construct the linked model and explain a controlled assumption change.
- Submit the capstone memorandum and evidence register.
- Achieve 80/100 and resolve all critical checks, including any funding or liquidity failure.
See the learning path for units, instructor/student distinctions and verification limits.