05 May How Financing Shapes a Deal More Than You Expect
Many sellers are surprised to discover how much influence a buyer’s lender has over the sale process. Even when a buyer is motivated and the business looks strong, financing isn’t a formality; it’s an ongoing evaluation that can shape price, structure, timing, and even who can realistically buy the business.
A “Yes” Is Conditional Until Closing
A bank’s approval doesn’t arrive once and stay put. A loan moves through several sets of hands, and each stage brings a different level of scrutiny.
A loan officer takes the first pass based on what’s available early in the process. If it clears that threshold, the file moves deeper into the institution – to underwriters who stress-test assumptions, and eventually to a credit team that reviews the full documentation package. What looked straightforward at the LOI stage can surface complications months later, as more complete information comes to light.
This isn’t a flaw in the process. It’s how lenders manage risk. But it does mean that sellers and buyers who understand this sequence tend to be better prepared for the timeline and less caught off guard when questions arise late.
The Role of Debt Service Coverage
At the center of a lender’s analysis is Debt Service Coverage Ratio (DSCR). In plain terms, lenders want to confirm that the business generates enough cash flow to comfortably cover loan payments with room to spare.
For this, they rely heavily on tax returns. A business may be having a strong current year, but without a completed return prepared by an independent accountant, recent performance carries limited weight in underwriting. This can create a gap between how a seller experiences the business today and how a lender evaluates it.
How much weight the most recent year carries depends on context. If last year was the weakest year in recent memory, expect it to cast a long shadow. If last year was an outlier in the other direction – well above the trend line – underwriters are more likely to average across multiple years than to assume the business has permanently shifted to a higher level of performance. The question they’re always asking is what the business can reliably produce going forward. The answer to that question, not the calendar, drives how they weight the numbers.
When Tax Strategy and Sale Strategy Diverge
Strategies that reduce taxes during ownership and strategies that maximize sale proceeds often pull in opposite directions. This is one of the more common tensions in a transaction, and the gap has been widening.
Lenders have grown increasingly conservative about add-backs – the owner expenses that brokers and sellers argue a buyer wouldn’t incur and therefore shouldn’t count against earnings. In practice, many banks today are skeptical of all but the most straightforward adjustments. Depreciation, amortization, interest, and pre-tax net profit are generally accepted. Beyond that, the scrutiny has intensified.
The standard has quietly shifted from “would the owner have incurred this?” to “would the buyer?” Those aren’t always the same question. A vehicle lease being covered by the business is a good example. A seller might reasonably argue that a buyer wouldn’t lease those specific vehicles. A lender might just as reasonably respond that any owner-operator is going to have automotive expenses, and that the business will need to cover them one way or another. Same logic applies to health insurance and similar benefits. If the buyer is going to replace the expense in some form, it doesn’t come out of the cash flow calculation.
The practical implication: sellers who have run aggressive but legitimate tax strategies for years may find that the earnings picture a lender recognizes looks meaningfully different from the one their broker presents. Understanding that gap early, before you’re in the middle of a transaction, gives you more options.
When the Numbers Don’t Support the Loan
When a lender determines that the numbers don’t support the loan as structured, buyers have a few options. They can increase their equity injection, bringing more cash to the table. They can explore whether another lender with a different risk appetite might view the deal differently. Or the parties can renegotiate price or structure.
One tool that sometimes bridges the gap is a Seller’s Note. This is an arrangement where the seller agrees to finance a portion of the purchase price directly. This can reflect genuine confidence in the business’s future performance, provide flexibility in deal structure, or help both parties reach an agreement that works within lender constraints. Like any tool, its value depends on how and why it’s being used.
A note on shopping a loan: SBA lenders all operate under the same federal guidelines, which means issues identified by one lender tend to resurface with the next. A second opinion can sometimes yield a different outcome, but the underlying questions don’t go away simply by changing banks.
A Common Thread
What connects all of this is risk; specifically, how lenders think about it and how sellers can prepare for it.
A lender’s job is not to find reasons to approve a loan. It’s to determine whether the risk is defensible. That distinction matters because it reframes what preparation actually means. It’s not about presenting the business in the most favorable light. It’s about giving a lender a clear, documented, internally consistent picture that holds up as the deal moves through each stage of review.
Sellers who understand this going in tend to be more flexible when complications arise. And complications almost always arise. A buyer who is genuinely qualified, properly capitalized, and committed to the process is not easy to replace. Finding another buyer who clears the same bars, connects with the business, and is willing to start the financing process from scratch is a longer road than it might appear from the outside.
The most productive deals we’ve been involved in share a common characteristic: both parties understood early that financing wasn’t a separate step that happened at the end. It shaped everything – what the business could sell for, how the deal was structured, and how long it took to get to closing. The sellers who internalized that tended to make better decisions when the process got hard.
