L-121 · Lesson
What you can put in and what you must not touch
Free Practitioner review pending Reviewed 2026-10-03
The decision
How much cash can I actually put into a deal, and what must I leave alone?
Why this matters
Your Buy Box says what you want. It does not say what you can afford, and the two are easy to confuse. A price ceiling written from a feeling has no cash plan behind it.
Capacity is the other half of the question "what can I buy?". It starts from your cash, and it starts with a distinction that first-time buyers often miss: the money in your accounts is not the money you can put into a deal. Some of it keeps your household running if the business takes longer than planned to pay you. If you spend that too, you have not bought a business with your savings. You have bought it with your safety margin.
This lesson teaches you to separate the two piles, to say honestly what you do not yet know, and to keep three different questions apart: what you can afford, what a business is worth, and what a lender will finance. You finish by running your Acquisition Capacity Model, the fourth output in your Buyer School work.
Concept: two piles of cash
Investable cash
The first number in your capacity model is simple, and the work is in the entries.
- Cash you can reach
- minus your household reserve
- equals cash you can invest
Cash you can reach means money you could move into a deal without hurting your household or paying a cost you have not counted. Whether a particular source qualifies, and what it would cost to use, is a question for your accountant or adviser, not for this lesson. The test to apply is whether you can name the account, the balance and anything you would lose by moving it.
Household reserve is the cash you will not touch. It is yours to set, and the model asks you to enter it. There is no universal reserve, and Buyer School does not supply one. A figure copied from an article would not know your household.
The reserve should include everything you must keep, not just a general cushion: a tax bill you already know is coming, a planned expense, a payment owed to someone else. The tool has a single reserve field, so put those in it. If you leave a known demand out, your investable cash will look larger than it is.
How to decide your reserve
Work from your household:
- Start from your Readiness answers. The runway you gave there, the number of months your household could manage without business income, is your starting point.
- List fixed costs and known demands. Housing, insurance, debt payments, anything due soon.
- Ask who depends on this money. A partner, children or relatives change what a safe margin is.
- Decide which risks you would not carry. If a month with no pay for you would stress your household, build that into the reserve.
- Write the number and the reasoning. A reserve you can explain is one you will defend when a deal looks attractive.
A personal guarantee raises the stakes
Readiness asked you about personal guarantees. Capacity is where they matter. A guarantee means a lender can look to your personal assets if the business cannot repay. The cash you invest is what you could lose through the business. A guarantee can put more than that at risk.
So the ownership threshold is not a line to stay safely under. That is one program and one rule as of one date. Other lenders and other loan types set their own requirements, and a lender can ask for more than a rule requires. Your lender will tell you what a deal needs, and this school does not assume every loan follows the same pattern. What carries over is the habit: when a guarantee is likely, plan your reserve knowing that more than your invested cash is exposed. A reserve is a planning choice. Calling money a reserve does not shield it from a guarantee, a collateral pledge or collection. Ask an attorney which assets and funds would be exposed under the actual documents, and remember that a spouse's support for the plan is not consent to pledge property you hold together.
What lenders ask you to put in
Financing programs often require the buyer's own cash, and the rule is usually measured against the whole cost of a deal, not just its price.
Two things follow. A minimum is a floor, and a lender may ask for more. And the base is the total project cost, which is why the next lesson walks through everything a deal costs beyond the price. The capacity tool opens with a school illustrative down payment share. That share is not the SBA minimum and not a lender's offer. It is a placeholder for you to replace with what a lender tells you.
Three questions that sound alike
A Buy Box ceiling, a financing conversation and a valuation each produce a price, and they answer different questions.
| The question | It asks | Where you answer it |
|---|---|---|
| What can I afford? | What your cash and your income need can support | Here, in your capacity model |
| What is it worth? | What the business's earnings justify | Later, in valuation |
| What will a lender finance? | What a lender would lend, on what terms | Later, in financing |
When you reach the Deal Lab, these become four prices you keep separate: the seller's asking price, an indicative value from the business's earnings, the price a lender might finance, and your own maximum. None of them sets another. A business can be worth more than you can afford, and a business you can afford can be worth less than its asking price. The point to take from this lesson is only that affordability comes from you.
Unknown is not zero
The model asks for some figures you may not yet have, such as closing costs and opening working capital. If you leave them blank, the tool says "unknown until you see a business" and reports your results as at least a figure. That is the right behavior.
Typing zero is a claim that the cost does not exist. Leaving it unknown is a claim that you have not learned it yet. A result built on unknowns is a floor: the real number can only be higher. Never read a floor as a ceiling.
What you entered and what the school supplied
Every number in the model is one of two kinds, and the tool labels them.
- Your entry is something you typed: your cash, your reserve, your cost estimates.
- School illustrative financing default is a placeholder the tool fills in for the loan's down payment share, interest rate and term. It is not a quoted rate, not a program maximum, not a forecast and not evidence that any financing exists.
Change a default as soon as you learn something real, and expect every conclusion to move when the terms do.
A planning model, not a lender's
The capacity model is a Buyer School planning model. It is not a lender calculation, an SBA underwriting model or a financing approval. It applies one down payment share, and so one financed share, to the price and to some other costs, and a lender may treat each use differently. Read its output as the range worth investigating. Never read it as "the model says I can afford this, so a lender will finance it."
Worked example: two views of the same savings
Illustrative example
This buyer is fictional and the numbers are invented for this lesson.
Dana has $140,000 she can reach. She wants to keep a $57,000 household cushion and knows she owes an $11,500 tax bill soon. She enters a reserve of $68,500, which covers both.
Her Buy Box ceiling is $450,000. She estimates closing costs of $30,000 and opening working capital of $23,000, and she enters a down payment share of 20% as an illustrative figure.
| The view that feels right | The view the model gives | |
|---|---|---|
| Cash she has | $140,000 | $140,000 |
| Cash she can invest | $140,000 | $71,500 after the $68,500 reserve |
| A deal at her ceiling asks for | $100,600 in cash (20% of $503,000 in total costs) | $100,600 in cash |
| Cash left after closing | $39,400 | $39,400, which is $29,100 below her reserve |
| Highest price her cash supports | Looks fine | $304,500 |
At $450,000 the deal asks for more than her investable cash and leaves her below her own reserve. The highest price her investable cash supports is $304,500. Her ceiling was a wish, and the model turned it into a question: raise the cash, lower the ceiling, or find a different structure with a lender.
Had she left the tax bill out of her reserve, her investable cash would have looked like $83,000. That is the quiet way the model gets overruled.
The tool gets that supported price by dividing her investable cash by the down payment share and then taking out the closing costs and working capital. The next lesson explains those two deductions.
Failure modes
1. Treating all cash as investable
How it shows up: "I have 140, so I can put in 140." The reserve is not on the page. What to do: write the reserve first and subtract it before you look at what a deal asks for.
2. Writing a price ceiling with no cash behind it
How it shows up: the Buy Box ceiling comes from what feels reasonable or what a broker mentions, and nobody checks what cash a deal at that price would require. What to do: run your capacity model against your ceiling and treat any shortfall as a decision to make now.
3. Mixing "I can afford it" with "it is worth it"
How it shows up: a business priced at the edge of your capacity is treated as good value because it fits your budget. Fitting your budget says nothing about the earnings that justify its price. What to do: keep capacity, value and financing as three separate questions.
4. Reading a blank as a zero
How it shows up: the cost fields are filled with zero so the model returns an answer. The answer is then read as the real requirement. What to do: leave unknowns blank, expect "at least", and replace them with estimates when you have them.
Buyer rules
Buyer rule
Your reserve comes out first. What is left is what you can invest.
Buyer rule
Unknown is not zero. A result with unknowns in it is a floor.
Apply it
- Write your reserve and the reasoning behind it. Start from your Readiness runway and add every known demand.
- List where your cash is by account and note anything you would lose by moving it.
- Ask yourself the guarantee question. If a lender asked for a personal guarantee, what would it put at risk beyond the cash you invest?
- Mark each number you will enter as your own figure or a school default you plan to replace.
Tool: the Acquisition Capacity tool
The capacity tool turns your cash, your reserve, your income need and your Buy Box ceiling into a first picture of what you can do. It collects four things from you and shows what follows from them. It does not repeat this lesson's steps, so use it to test them.
Enter your cash and your reserve honestly, with the reasoning you wrote. Leave the cost fields blank unless you have an estimate, and expect the result to say "at least". Replace the loan terms when you learn better, and leave them marked as school defaults until then.
The result to read first is the comparison between the highest price your investable cash supports and your Buy Box ceiling. If the first is lower than the second, your ceiling is not backed by your cash, and you must change one or the other. If the tool says the deal leaves you below your reserve, do not accept the result as a minor warning. It tells you the deal would be paid for partly with your safety margin.
The tool needs two things from earlier work: the income need from your Buyer Profile and the highest price from your Buy Box. If either is missing it will say so. When you have run it, return to your Buy Box and check your ceiling against what the model shows.
Lesson, then tool, then output
Acquisition Capacity
You finish this lesson by producing a real output: Acquisition Capacity Model. Progress in this school is work you have completed, not pages you have read.
Next decision: The full cost of a deal
Evidence required
Capacity is about your own money, so the evidence is yours to gather.
- Cash you can reach: recent balances on statements, with the date, for each account you count.
- Your reserve: the household budget and the list of known demands behind it. If you cannot show how you reached the number, it is not yet a decision.
- Loan terms: a conversation with a lender, which replaces the school defaults. Until you have one, say the terms are placeholders.
- Your guarantee exposure: a plain statement of what you would put at risk if a lender asked for a personal guarantee, which you can take to an attorney.
This is the same work a lender will ask you to show, done earlier and without pressure.
Decision question: how to test a ceiling
A buyer has $140,000 in the bank and a Buy Box ceiling of $450,000. How should the buyer decide whether the ceiling is affordable?
Open each answer to see why it is or is not the stronger one.
Compare the ceiling with what similar businesses sell for
Weaker answer. That is a question about value, not about what the buyer can afford. It matters later and answers a different question.
Treat it as affordable because lenders finance most of a purchase price
Weaker answer. Lenders ask for the buyer's own cash, measured against total costs. Financing does not remove the need for it.
Use the full $140,000 and rebuild savings after closing
Weaker answer. The reserve exists because the first year is when an unexpected gap is most likely, and rebuilding comes after the risk.
Subtract the reserve and other required cash to find investable cash, then see what price that cash supports with realistic costs and loan terms
Defensible answer. Affordability starts with what you can put in, and the price you can reach follows from it.
Scenario check
A friend says a buyer should always keep a certain number of months of expenses in reserve. How should the buyer treat that?
Open each answer to see why it is or is not the stronger one.
As the rule to follow, since an experienced friend has seen it work
Weaker answer. One person's experience is useful, though it is not a universal rule, and it may not fit this household.
As something to ignore, since reserves are not part of buying a business
Weaker answer. The reserve is the main thing that separates investing in a business from risking the household.
As one view to consider, then set the reserve from the household's own costs, obligations and risks, and write down why
Defensible answer. A rule of thumb does not know your household. The buyer owns the number and its reasons.
A lender says a buyer will need to give a personal guarantee. How should that change the buyer's capacity thinking?
Open each answer to see why it is or is not the stronger one.
It does not change anything, since the guarantee only matters if the business fails
Weaker answer. A guarantee matters because the business might fail, which is what a reserve is for.
The buyer should walk away, since no business is worth a personal guarantee
Weaker answer. Many buyers accept one knowingly. The point is to decide with the exposure in view.
The buyer should consider that more than the invested cash is exposed, and may set the reserve or the ceiling more cautiously
Defensible answer. A guarantee extends the risk past the cash in the deal. It does not change the arithmetic, and it changes how much safety margin is wise.
The tool opens with a down payment share, interest rate and loan term already filled in. What are they?
Open each answer to see why it is or is not the stronger one.
The rates and terms a lender will offer to a buyer in this position
Weaker answer. Nothing in the tool knows what a lender will offer to any buyer.
The most the program allows, so the buyer should keep them
Weaker answer. They are not a program limit, and they were not chosen to match one.
School illustrative financing defaults, placeholders the buyer should replace with figures a lender gives
Defensible answer. They are teaching placeholders, not an offer, a program maximum or a forecast.