The headline price is not the price. Enterprise value, less funded debt, less debt-like items, plus or minus the working capital adjustment, is the equity purchase price. Escrow and the seller note then come out to reach the wire. Debt-like items are where six figures move, and where an unwary buyer inherits obligations nobody priced.
How does enterprise value turn into the cash a seller receives at closing?
The bridge runs in one sequence. Agreed enterprise value, less funded debt, less debt-like items, plus or minus the working capital adjustment, equals the equity purchase price. Escrow and the seller note come out of that, and the remainder is wired at closing. The closing working capital figure is an estimate, adjusted later only if the agreement provides a true-up.
Define each term in the purchase agreement:
- Enterprise value. The agreed value of the business on a cash-free, debt-free basis. It is the number in the letter of intent.
- Funded debt. Borrowed money. Term loans, the line of credit, equipment notes, anything with a payoff letter.
- Debt-like items. Obligations that are not borrowed money but behave like it, because someone has already been paid and the work or the remittance is still owed.
- Working capital adjustment. The difference between current assets less current liabilities delivered at closing and the agreed target, called the peg. A peg and a post-closing true-up are negotiated, not automatic, and plenty of agreements at this size have neither.
- Escrow or holdback. Price parked to satisfy indemnity claims. A holdback is ordinary here; size and duration are negotiated every time. Representation and warranty insurance is uncommon on deals this size, so do not plan around it.
- Seller note. Deferred price on a promissory note. To count toward your SBA equity injection, current SBA procedure requires full standby, no payments while the SBA loan is outstanding, and a cap of half the required injection.
I build the bridge on one page before I read the letter of intent’s headline number, and I ask for the payoff letters and the lien search before I ask the seller what the price is supposed to mean.
What does the bridge look like at a $3 million price?
A three million dollar enterprise value rarely produces three million dollars of wire. Funded debt of $240,000, debt-like items of $275,000, and a working capital shortfall of $50,000 produce an equity purchase price of $2,435,000. That is a swing of $565,000 between the headline number and the number the seller signs for.
| Bridge line | Amount |
|---|---|
| Agreed enterprise value (cash-free, debt-free) | $3,000,000 |
| Less funded debt: equipment note and drawn line of credit | ($240,000) |
| Less debt-like items (detail below) | ($275,000) |
| Working capital: $310,000 estimated at closing against a $360,000 peg | ($50,000) |
| Equity purchase price | $2,435,000 |
| Less indemnity escrow | ($120,000) |
| Less seller note | ($300,000) |
| Cash wired to seller at closing | $2,015,000 |
The debt-like column there is ordinary: unremitted payroll tax of $35,000, accrued paid time off of $48,000, customer deposits on undelivered work of $70,000, an equipment lease payoff of $26,000, an owner loan of $40,000, roof and HVAC work the lease requires of $25,000, unremitted retirement deferrals of $9,000, and credit card balances of $22,000.
There is a financing consequence most first-time buyers miss. Your lender sizes the loan on total project cost, and current SBA procedure requires an equity injection from you on a change of ownership. Moving an item into the seller’s payoff column can reduce the amount financed, your injection, and your debt service, but only if your lender treats it that way, so ask before you assume. The guaranty is not optional either: SBA loan conditions generally require holders of at least a twenty percent ownership interest to guarantee the loan.
Law: 13 CFR 120.160(a). SBA procedure stated as of September 2026; confirm the governing version with your lender.
Debt-like items are not a negotiating flourish. They are the difference between buying a business and buying a business plus a stack of other people’s unfinished obligations.
Which liabilities count as debt-like items in a small company?
Debt-like items in owner-operated companies are predictable. Unremitted payroll and sales tax, accrued paid time off, customer deposits and unearned revenue, capital and equipment lease obligations, owner loans and declared but unpaid distributions, deferred maintenance the lease requires, unfunded retirement contributions, credit card balances, and any deferred payment the target already owes a third party.
| Item | Why it behaves like debt | What to demand |
|---|---|---|
| Unremitted payroll and sales tax | Money withheld or collected for a government and not sent. Past due amounts are not an operating accrual. | Paid at closing from seller proceeds, with filed returns and a transcript or clearance where the authority issues one. |
| Accrued paid time off | Hours earned on the seller’s watch, taken on yours. Some states treat vested vacation as wages payable at the final rate; others leave it to policy. | Paid out by the seller at closing, or credited dollar-for-dollar. |
| Customer deposits and unearned revenue | Cash already collected and spent, work still owed. | Credit at the cash amount, not the accounting balance, unless the peg captures it. |
| Capital and equipment leases | Fixed payment streams on assets you need. Whether a lease is a true lease or a disguised security interest turns on the facts. | Payoff and lien termination, or an assumption priced into the bridge. |
| Owner loans and unpaid distributions | Related-party balances the seller controls on both sides. | Settled or forgiven at closing, in writing, and disclosed to the lender. |
| Deferred maintenance the lease requires | A landlord’s claim that can land on you when you take assignment. | A scoped estimate and a credit, or completion before closing. |
| Unfunded retirement contributions | Deferrals withheld from pay become plan assets once they can reasonably be segregated from company assets. | Deposited and corrected before closing. |
| Credit card balances | Revolving borrowing that sits in payables and looks operational. | Zeroed at closing or included in funded debt. |
| Deferred payments to third parties | Settlement installments, vendor payment plans, deferred price from the target’s own prior acquisition. | The underlying document, then payoff or a priced assumption. |
Law: 29 CFR 2510.3-102 (withheld contributions are plan assets as of the earliest reasonable segregation date, with a safe harbor for plans under 100 participants where amounts are deposited within seven business days after they are received or withheld). Cal. Lab. Code 227.3 (California example; other states differ, so check yours).
How do you classify a liability without double counting it?
Every liability on the target’s balance sheet belongs in exactly one of three columns: debt the seller pays at closing, a current liability already inside the working capital target, or a cost the buyer absorbs in the price. One column each. A liability that appears in two columns has been charged to the seller twice.
Run the sort line by line and write the column next to each account in the trial balance. Ordinary course payables belong in the peg. Sales tax collected this period and not yet due belongs in the peg. Sales tax that was due last quarter and never remitted is debt. The test is not the account name. It is whether the obligation is ordinary and current or overdue, and the agreement’s definitions control.
Then check the arithmetic in the other direction. If accrued paid time off sits in the peg and you also deduct it as a debt-like item, expect the seller’s accountant to catch it and your credibility on the rest of the list to go with it.
An item is debt, or it is in the peg, or you eat it. It cannot be two of those, and a buyer who charges it twice is making an arithmetic argument that is hard to defend.
When does calling everything debt-like become a retrade?
Reclassification has a limit, and buyers cross it. Sweeping every uncomfortable liability into the debt-like column is not diligence. It is a price reduction wearing a spreadsheet, and a seller represented by a broker will read it that way, particularly when the items arrive late and in one batch after the letter of intent is signed.
The practical cost is time. A late repricing can send the file back to the lender for a revised use of proceeds, can prompt a fresh look at valuation, and can push the closing date, and nobody on your side of the table controls that schedule.
Move early instead of hard. Put the definition of debt-like items into the letter of intent in words, list the categories you intend to apply, and settle the working capital methodology early, before any quality of earnings work is finalized. An item raised in week two is diligence. The same item raised in week nine reads as a retrade.
How does SBA 7(a) financing decide which liabilities get paid at closing?
SBA financing narrows the choices. The regulations restrict what loan proceeds may retire, the lender’s lien search generates the payoff list, and closing statements ordinarily pay those payoffs directly rather than routing money through the seller. Buyers who assume the loan can clean up whatever the balance sheet shows tend to discover the limits at the worst moment.
Two restrictions matter most. Loan proceeds may not pay past due federal, state, or local payroll taxes, sales taxes, or similar taxes the applicant is required to collect and hold in trust for a government entity. Proceeds also may not fund payments, distributions, or loans to Associates of the applicant, except ordinary compensation for services rendered or to facilitate a change of ownership under the change of ownership regulation. Those rules govern loan proceeds, not every dollar at the table, so trust fund taxes and related-party balances get funded from the seller’s side of the closing statement or from money that is not loan proceeds.
Law: 13 CFR 120.130(a) and (e); 13 CFR 120.120; 13 CFR 120.202. Current as of September 2026.
The lien search drives the rest. Under Article 9 as enacted in your state, a security interest generally continues in collateral notwithstanding a sale unless the secured party authorized the disposition free of it, so an asset purchase does not by itself scrub a perfected lien on equipment you are buying. Other Article 9 rules can cut a lien off, including the buyer in ordinary course rule, and a financing statement lapses five years after filing unless a continuation is filed in the six months before lapse. Resolve each filing one of three ways: a payoff letter with a good-through date and a per diem, a written release, or documented evidence that the filing has lapsed or is unenforceable.
Law: UCC 9-315(a)(1); UCC 9-320(a); UCC 9-515 (as enacted in your state).
As of September 2026, SBA’s operating procedure for 7(a) lending is SOP 50 10 8, effective June 1, 2025, and SBA has published SOP 50 10 8.1 effective October 1, 2026, which applies to applications issued an SBA loan number on or after that date and moves the change of ownership rules into a dedicated appendix. Under SOP 50 10 8, a complete change of ownership requires an equity injection of at least ten percent of total project costs, and a seller note may count toward no more than half of that injection only if it is on full standby, with no payments, for the life of the SBA loan. Treat none of that as permanent. Your lender applies the version in force when your loan number issues, SBA amends the SOP by procedural notice between editions, and the lender decides how a rule applies to your file. Confirm the current text with your lender before you rely on any of it.
Rule: SOP 50 10 8 (effective June 1, 2025); SOP 50 10 8.1 (effective October 1, 2026). Stated as of September 2026.
Why should unremitted payroll and sales tax be paid at closing instead of indemnified?
Trust fund taxes are different in kind. Withheld income and employment taxes were never the employer’s money, and federal law imposes a penalty equal to the total amount on any person required to collect, truthfully account for, and pay over those taxes who willfully fails to do so. That exposure attaches to responsible individuals, not only to the company.
Law: 26 U.S.C. 6672.
Apply that to the two structures. In an equity purchase, the taxpayer is the same entity before and after closing, so the liability survives the change of ownership, and once you control which creditors get paid you risk becoming a responsible person yourself. In an asset purchase, state law can still reach you. New York, for example, requires a bulk purchaser to notify the tax department at least ten days before taking possession of the assets or paying for them, and a purchaser who fails to do so can be personally liable for the seller’s unpaid sales tax, capped at the purchase price or the fair market value of the assets, whichever is higher. Most states have repealed the uniform bulk sales article, but many keep their own tax notice and clearance rules.
Law: 26 U.S.C. 6672; N.Y. Tax Law 1141(c).
Now the consequence. An indemnity is a promise from a person who has just received your money and may be retired, relocated, or judgment proof when an assessment arrives. A payoff at closing is cash leaving the settlement statement while you are still holding it. On trust fund taxes, paid beats promised. Insist on payment at closing, filed returns, and whatever transcript or clearance the authority issues, recognizing that some issue nothing and others take weeks.
What should you do before your next call with the seller?
Start with the documents that produce the list rather than the seller’s summary of it. The bridge is built from payoff letters, lien searches, tax filings, and the lease. Everything else is commentary. Work in this order and you will be able to tell the seller which items you expect paid at closing rather than promised afterward.
- Write the bridge on one page in the sequence above, even if half your numbers are estimates.
- Mark every liability account on the trial balance with one column: debt, peg, or absorbed. Zero accounts get two marks.
- Request the last eight quarters of federal employment tax and state sales tax filings, plus transcripts or clearance where the state issues one.
- Order a current lien search on the entity and every trade name, then get a payoff letter or written release for each financing statement.
- Read the lease for maintenance and restoration obligations already due, and price them with a contractor estimate.
- Pull the payroll register for accrued time off by employee, confirm your state’s payout rule, then decide whether the seller pays or credits it.
- Ask for deferred revenue and customer deposit detail by customer, with delivery dates.
- Send your lender the draft bridge and use of proceeds before you send the seller a revised number, and ask which lines the loan can and cannot fund under the SOP version governing your loan.
- Put the definition of debt-like items and the working capital methodology into the purchase agreement in words.
Then hold the line on sequencing. Items you identify early read as diligence, items you identify late read as a repricing, and the earlier you ask, the more room the seller has to pay rather than promise.
Keep reading
The Seller’s LibraryCash-free debt-free: what counts as debt is negotiableThe Seller’s LibraryThe 401(k) must be terminated before closing, not on it.The Buyer’s LibraryAn escrow and a holdback protect you differently
Have a lawyer read it before you sign.
A purchase is decided in a handful of documents you sign exactly once — the letter of intent, the note, the indemnity. There is a right time to have them read, and it is before the lender sets your closing date.
Before founding Prencipe International, Joe practiced at the top law firms in the world, including Freshfields Bruckhaus Deringer, Baker McKenzie, Morgan Lewis & Bockius, and served at the U.S. Securities and Exchange Commission. He has spent his career on high-stakes disputes and transactions for businesses that cannot afford to lose. He represents buyers acquiring SBA 7(a)-financed businesses -- reading the letter of intent before it is signed, and the purchase agreement while there is still room to change it.
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