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When embarking on the journey to purchase a small business, one of the most critical decisions you’ll face is determining how to finance the acquisition. The two primary avenues are debt financing and equity financing. Each comes with its own set of advantages, risks, and implications for your future as a business owner.

In this article, we’ll delve into the nuances of both financing options, helping you make an informed choice that aligns with your financial goals and risk tolerance.

The J Curve in business acquisition is a financial concept illustrating the typical earnings trajectory following a company purchase. Visualized as a “J”-shaped graph, it highlights an initial decline in profitability—usually EBITDA—immediately after the acquisition, followed by a gradual, sustained recovery and growth.

Financing a business acquisition can be both thrilling and intimidating. The process involves navigating complex financial structures, understanding the cost of capital, and determining the best sources of funding to reach your objective.

Unlike the straightforward nature of something like a home mortgage, business acquisition financing is much more complicated, often involving a blend of debt and equity. This blend, known as the capital stack, is used to optimize both affordability and long-term growth.

Let’s explore the capital stack, its components, and how to strategically finance your next acquisition.