How to Buy a Business and the Real Estate in One Transaction Using SBA Financing (And When to Split It Between a 7(a) and a 504—With First Right of Refusal Language)
Buying an operating business and the real estate it occupies in a single transaction is one of the most powerful—but misunderstood—ways to build long-term wealth using SBA financing. When structured correctly, it allows an entrepreneur to control the operating company, lock in occupancy costs, build equity in real estate, and often put less cash down than with conventional financing.
But the structure matters.
Sometimes the cleanest solution is a single SBA 7(a) loan. Other times, the best outcome is to close with a 7(a) and later refinance or bifurcate the real estate into an SBA 504, using carefully drafted first right of refusal (ROFR) or purchase option language baked into the original transaction.
This article walks through:
- How SBA financing treats business + real estate acquisitions
- When a single 7(a) makes sense
- When and why a 7(a) → 504 split is the smarter long-term play
- How first right of refusal language protects the buyer
- Common mistakes that derail deals
- A real-world timeline approach that actually works
This is written for serious buyers—not seminar attendees.
The Core Concept: Business + Real Estate = Two Assets, One Strategy
At a high level, you are acquiring two distinct assets:
- An operating business (cash flow, goodwill, equipment, workforce)
- Owner-occupied commercial real estate (land + building)
The SBA allows these assets to be financed together or separately, provided:
- The buyer is an owner-operator
- The business occupies at least 51% of the property (or 60% for new construction)
- The transaction meets SBA eligibility and underwriting standards
Where most buyers go wrong is assuming there is only one “right” structure.
There isn’t.
Option 1: Buying the Business and Real Estate Together Using a Single SBA 7(a)
When This Works Best
A single SBA 7(a) loan is often the fastest and simplest structure when:
- Total project size is under ~$5.5–$6 million
- The real estate value is not disproportionately large relative to cash flow
- Speed and certainty matter more than long-term rate optimization
- The seller wants a clean exit in one closing
How the 7(a) Treats Real Estate
Under a 7(a), the real estate is:
- Financed as part of the business acquisition
- Amortized up to 25 years
- Typically priced at Prime + a spread
- Secured by the property and the business assets
This works well when:
- The business cash flow easily supports the full debt service
- The buyer is comfortable with variable rates
- The deal does not need layered capital stacks
Pros of a Single 7(a)
- One loan, one closing
- Lower total cash injection than conventional loans
- Faster execution
- Flexible use of proceeds
- Easier coordination between buyer, seller, and lender
Cons to Be Aware Of
- Variable interest rate risk
- Less efficient long-term real estate financing
- Larger loan balance tied to operating risk
- Less flexibility to optimize the real estate later unless planned upfront
This is where strategic foresight matters.
Option 2: Buying with a 7(a), Then Splitting the Real Estate into a 504 Later
This is where experienced buyers separate themselves from first-timers.
In many cases, the best structure is not available on Day One—but can be unlocked later if you plan for it correctly at closing.
Why Buyers Do This
The SBA 504 program offers:
- Long-term fixed interest rates
- Lower blended rates for real estate
- Higher leverage on the property itself
- Improved cash flow over time
But 504 loans:
- Are slower to close
- Are less flexible for goodwill-heavy transactions
- Require more coordination between lenders and CDCs
So buyers often:
- Close everything with a 7(a) for speed and certainty
- Stabilize operations
- Season ownership
- Refinance or carve out the real estate into a 504
This Is Not a Loophole
It is a planned capital strategy—and it must be documented correctly from the beginning.
The Role of First Right of Refusal (ROFR) Language
If the real estate is not acquired at the same time as the business, or if the seller wants flexibility, first right of refusal language becomes critical.
What a ROFR Does
A properly drafted ROFR:
- Gives the buyer the first opportunity to purchase the property
- Prevents the seller from selling to a third party without notice
- Preserves SBA eligibility for future owner-occupied financing
- Protects the buyer’s operating continuity
Why SBA Buyers Should Care
Without ROFR or purchase option language:
- The landlord could sell the property to an investor
- Rent could increase materially
- SBA owner-occupied eligibility could be lost
- A future 504 refinance may be impossible
Where the Language Belongs
ROFR language can live in:
- The lease agreement
- The asset purchase agreement
- A separate recorded memorandum
- A purchase option addendum
What matters is enforceability, not just good intentions.
Timing Matters: The Right Way to Sequence the Financing
A common misconception is that buyers must decide everything upfront.
In reality, the best deals follow a phased approach.
Phase 1: Acquisition (7(a))
- Acquire business and/or real estate
- Establish operating control
- Maintain clean financial reporting
- Avoid unnecessary restructures in Year One
Phase 2: Stabilization
- Normalize earnings
- Improve margins
- Demonstrate DSCR strength
- Maintain compliance with SBA covenants
Phase 3: Optimization (504 Refinance)
- Separate real estate into its own borrowing entity (if appropriate)
- Use SBA 504 for long-term fixed debt
- Improve monthly cash flow
- De-risk the operating company
This is how sophisticated buyers manufacture optionality.
Common Mistakes That Kill These Deals
1. Treating the Real Estate as an Afterthought
SBA lenders underwrite occupancy stability heavily. If the real estate is poorly documented, the loan can stall—or worse, be declined.
2. Not Coordinating Advisors
Your broker, lender, CPA, and attorney must be aligned. Misaligned advice creates delays and risk.
3. Ignoring Future Capital Strategy
If you don’t plan for a 504 refinance upfront, you may unintentionally block it later.
4. Using Boilerplate Lease Language
Generic leases often fail SBA scrutiny and fail to protect the buyer.
5. Overleveraging the First Transaction
Sometimes the best move is not buying the real estate immediately—but securing the right to do so later.
Real-World Example
A buyer acquires:
- A manufacturing business
- $1.8M in annual EBITDA
- A facility valued at $2.5M
Initial Close
- SBA 7(a) finances the business and property
- 10% equity injection
- Single closing for speed
18 Months Later
- Business cash flow stabilizes
- Buyer refinances the real estate into a 504
- Locks a long-term fixed rate
- Reduces operating company debt burden
- Improves monthly free cash flow
This was not luck.
It was intentional structuring.
Final Thought: SBA Financing Is a Tool—Not a Template
Too many buyers approach SBA financing as a checklist.
The reality is:
- SBA programs are tools
- Structure determines outcome
- Planning determines flexibility
- Documentation determines defensibility
Whether you use:
- A single SBA 7(a)
- A staged 7(a) → 504 strategy
- Or a split acquisition with ROFR protections
The goal is the same:
Control the business. Control the real estate. Control your downside.
That is how long-term operators—not speculators—build durable wealth.
If you want, next I can:
- Rewrite this for LinkedIn or Substack
- Turn it into a buyer checklist
- Add sample ROFR language
- Convert it into a deal flow diagram
- Or tailor it specifically to franchise, industrial, or medical acquisitions
