Your ceiling, and how debt service sets it

The short version

Two things set the most you can pay: the cash you can put in, and the loan payment the business itself can carry.
The business's limit is usually the tighter one. Lenders will not lend more than its earnings can support.
For an SBA loan to a buyer new to the business, the business must earn at least $1.25 for every $1.00 of loan payments, after a reasonable salary for you.
Work out your ceiling before you make an offer, and set your buy box to match.
A price above your ceiling is not a negotiating point. It is a deal the lender will not finance.

Two limits

Your cash. With an SBA loan, you need at least 10 percent of the total cost of the purchase, which includes closing costs and working capital as well as the price. If you have $250,000 available, that alone caps the total cost at about $2.5 million, so the price itself has to be lower.

The business's earnings. A lender will lend only what the business can repay. This is usually the tighter limit, and it is set by the business, not by you.

Your ceiling is whichever of the two is lower.

How the business sets the limit

Lenders use a test called debt service coverage. It compares the cash the business generates with the annual loan payments.

Start with the business's earnings for an owner, measured as SDE, seller's discretionary earnings.
Subtract a reasonable salary for you. You need to live, and the lender knows it.
Divide what is left by the annual loan payment.

For an SBA loan to a buyer new to the business, the result must be at least 1.25. The business needs $1.25 of earnings for every $1.00 of payments. This applies even if you have bought businesses before. When an existing business buys another in its own industry, the minimum is 1.15.

A worked example

These numbers are illustrations, not a quote.

Line	Amount
SDE	$500,000
Minus a salary for you	$120,000
Cash available for loan payments	$380,000
Divided by 1.25	$304,000 maximum annual loan payment

At an assumed 10.5 percent interest rate over 10 years, a $304,000 annual payment supports a loan of about $1.88 million. With 10 percent down, that is a price of about $2.09 million.

If the seller asks $2.6 million for this business, the earnings do not support it. A higher rate, a higher salary or a lower SDE after the lender's review all lower the ceiling further.

The Find your ceiling tool runs this for any business you are considering.

What can move the ceiling

A larger down payment lowers the loan and the payment.
A seller note shifts part of the price off the bank loan. Lesson 6.4 covers the rules.
The interest rate. Higher rates mean higher payments and a lower ceiling.
The real estate. Financing a building over a longer term lowers its payment. Lesson 3.5 covers this.
The lender's numbers. Lenders often accept fewer add-backs than the seller presents, which lowers SDE.

Back to your buy box

Once you know your ceiling, tighten the size range in your buy box to match. Lesson 1.2 covers the size line.

For a lender: "What salary do you deduct for me, and what rate and term would you assume?" Listen for: their actual assumptions, so your own math matches theirs.
For a lender: "For a business earning this much, what is the most you could lend?" Listen for: a number based on their coverage test, not a general guess.
For your CPA: "Which of the seller's add-backs would a lender likely reject?" Listen for: specific items, and what SDE looks like without them.

This names the question. Your CPA, your M&A attorney and your lender answer it for your situation.

Figures from SBA SOP 50 10 8.1, effective October 1, 2026. Figures in the example are illustrative arithmetic, not an appraisal, a loan offer or a financing opinion.

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