When an architecture or engineering firm changes hands, the conversation always starts with valuation. What's the firm worth? But the question that actually determines the outcome is different: how does the buyer pay for it?
The deal structure dictates everything downstream. It determines how much cash the seller receives at closing, how much risk stays on the table after the transaction, and whether the deal can actually get financed. In the A/E space, where most firms trade between $1M and $10M, four deal structures account for the vast majority of transactions.
Understanding the trade-offs between them is the difference between a deal that closes cleanly and one that falls apart at the finish line.
The valuation sets the price. The deal structure determines whether anyone actually gets paid.
This is the gold standard for A/E firm acquisitions in the $1M to $10M range, and the structure we use most often at Allen Business Advisors.
The mechanics are straightforward. The buyer contributes 5% to 10% of the purchase price as an equity injection. An SBA-approved bank provides the remaining 90% to 95% as a loan guaranteed by the Small Business Administration. The seller receives their money at closing, typically 90% to 100% of the purchase price in cash.
The company is the borrower, not the individual buyer. The loan is repaid from the firm's ongoing cash flow over 10 to 25 years depending on the asset mix. For architecture and engineering firms with stable, recurring revenue and a solid backlog, SBA lenders are generally comfortable with these transactions because the cash flow is predictable.
What makes this structure work for A/E firms specifically is the nature of the revenue. Banks love firms with long client relationships, contracted backlog, and diversified project pipelines. A civil engineering firm with 15 municipal clients and $2M in contracted work is exactly the kind of business banks want to finance.
Seller risk: Low. Cash is in hand at closing. No long-term exposure to business performance.
Buyer risk: Moderate. The loan is secured by the business, and the buyer typically provides a personal guarantee. But the SBA guarantee reduces the bank's risk, which translates to more favorable terms.
Best for: Internal employee buyouts, key employee acquisitions, first-time buyers acquiring an existing firm.
In a seller-financed deal, the owner carries a portion (or sometimes all) of the purchase price as a promissory note. The buyer makes regular payments to the seller over 3 to 7 years, funded by the company's cash flow.
This structure is common when the buyer can't qualify for bank financing, the deal is too small to justify SBA loan costs, or the seller wants to spread their tax liability across multiple years. It can also be used when the seller is willing to stay connected to the business for a period after closing.
The problem is risk. The seller is essentially acting as the bank. If the business underperforms after the transition, the seller's retirement income is directly affected. Collecting payments from former employees or partners who are now running the business can be both financially and emotionally complicated.
Seller risk: High. Retirement depends on the continued success of the business under new ownership.
Buyer risk: Lower than SBA in some ways (no personal guarantee to a bank), but the seller's ongoing involvement can create governance friction.
Best for: Very small transactions (under $500K), deals where the seller wants to stay involved, or situations where bank financing isn't available.
When the seller carries the note, they don't really leave. Their retirement depends on someone else running the business they built. That's a hard position to be in.
Many A/E firm deals land somewhere between a full bank-financed buyout and a pure seller-financed transaction. In a hybrid structure, the bank provides 70% to 85% of the purchase price through an SBA loan, and the seller carries a smaller note (typically 10% to 20%) on standby.
The SBA actually allows for this. Under current rules, the seller can provide up to 50% of the buyer's equity injection on standby, meaning the seller's note is subordinated to the SBA loan and typically has a standby period of 24 months where no payments are required.
This structure works well when the deal valuation stretches beyond what the bank is comfortable financing at 90%. It also helps when the buyer's equity injection is tight and the seller is willing to bridge the gap. The seller still gets the majority of their cash at closing, which is the key difference from a pure seller-financed deal.
Seller risk: Low to moderate. The bulk of the payment comes from the bank at closing. The standby note is a smaller, subordinated piece.
Buyer risk: Moderate. Two debt obligations instead of one, but the terms are usually manageable for a profitable A/E firm.
Best for: Deals where the valuation exceeds 5x EBITDA, transactions with tight buyer equity, or when the seller wants to demonstrate confidence in the successor's ability.
An earnout makes a portion of the purchase price contingent on the business hitting specific performance targets after closing. These targets might be revenue milestones, client retention rates, or EBITDA benchmarks measured over 1 to 3 years post-closing.
Earnouts are theoretically appealing because they bridge valuation gaps. If the buyer thinks the firm is worth $3M and the seller thinks it's worth $4M, an earnout lets them split the difference based on actual performance.
In practice, earnouts create friction. The seller, who is often staying on during the earnout period, has different incentives than the buyer. Disputes about expense categorization, revenue attribution, and management decisions are common. For A/E firms in particular, where relationships and project timelines span years, the measurement period rarely captures a clean picture.
We generally advise against earnouts when a bank-financed or hybrid structure can achieve the same outcome with less complexity.
Seller risk: Moderate to high. A portion of the payout depends on factors the seller may no longer control.
Buyer risk: Lower upfront cost, but the earnout creates an ongoing obligation and potential for disagreements.
Best for: Situations where there's a genuine valuation gap and both parties are willing to let performance settle the number.
For most A/E firms in the $1M to $10M range, a bank-financed SBA 7(a) buyout is the cleanest path. The seller gets paid at closing. The buyer gets manageable terms. The bank gets a cash-flowing, relationship-driven business to underwrite. Everyone's interests are aligned.
The Step-Up Legacy Plan is built on this structure. It's designed specifically for architecture, engineering, and land surveying firms where the buyer is typically a key employee or group of employees already working in the business. The familiarity between buyer and seller, combined with the firm's established cash flow, makes SBA lenders comfortable and the transition smooth.
If you're evaluating a potential acquisition or considering selling your firm, the structure of the deal matters as much as the price. Getting it right from the start saves months of negotiation and protects both sides.
Every successful A/E firm transaction starts with the right financing structure. Before you negotiate price, before you sign an LOI, before you engage attorneys, make sure the deal is built on a foundation that works for the bank, the buyer, and the seller.
At Allen Business Advisors, we've structured dozens of A/E firm transactions using SBA financing, and we work with lenders who understand the specific dynamics of project-based professional services firms. Whether you're buying or selling, we can help you evaluate your options and design a deal that actually closes.
Schedule a confidential conversation to discuss your situation.
Allen Business Advisors
John@AllenBusinessAdvisors.com
Office: (617) 992-6717 | Cell: (781) 443-4874
