Will the Bank Finance This Deal?
Every buyer asks the same first question: is this a good business?
The lender asks a different one: can this business pay us back, with room to spare, if things go a little wrong?
Those two questions produce very different answers. This week we take one deal and walk it through the exact tests an SBA lender runs, using the SBA rules that took effect October 1, 2026. You will see why the deal failed as listed, and how it got approved.
This is a composite deal built from transactions we have worked on. Names, locations, and figures are changed.
The Deal on the Table
Business: Commercial and residential HVAC service company in the Midwest
Years in business: 20
Team: 31 employees, 14 service vans. The owner runs sales and holds the master mechanical license.
Asking price: $3,400,000
Revenue (last fiscal year): $4,800,000
SDE per the listing advisor: $910,000
Implied multiple: $3,400,000 ÷ $910,000 = 3.74x SDE ✓
Maintenance agreement revenue: 38% of total
Largest customer: 14% of revenue
The buyer: an operations manager with 11 years at a commercial mechanical contractor, a 760 credit score, and $420,000 in liquid savings.
On paper, a good business and a good buyer. Here is what the bank did with it.
Test 1: The Bank Rebuilds the Earnings
Lenders do not underwrite the listing's SDE. They underwrite earnings they can prove.
Because the purchase price is $3 million or more, the new rules require the lender to order an independent Quality of Earnings report, built for the bank, not for the buyer or the seller. It must tie bank deposits to the P&L and to the tax returns for the trailing twelve months and the last two fiscal years.
The QoE found four problems with the add-backs:
SDE per listing advisor: $910,000
Spouse's salary added back: ($52,000). She does the books full time. The buyer has to replace her.
"One-time" compressor repairs: ($38,000). They show up every year. Recurring cost, not an add-back.
Personal vehicles: ($14,000). Two of the three "personal" trucks actually run service calls. That is a business cost, not an add-back.
Owner cash jobs: ($26,000). Claimed in the recast, not on the tax return. The bank cannot count it.
QoE-verified SDE: $780,000 ✓
Then the lender makes two more deductions:
New owner's salary: ($120,000). The buyer has to live, and the lender tests this against personal expenses.
Fleet replacement reserve: ($45,000). 14 vans, average age 7 years.
Earnings the lender underwrites: $615,000 ✓
The $26,000 line is the one buyers underestimate most. If income is not on the tax return, it does not exist to a lender. No exceptions.
Test 2: Can the Cash Flow Carry the Debt?
This is the number that decides the loan. Debt Service Coverage Ratio, or DSCR, is the earnings the lender underwrites divided by every dollar of annual loan payments.
The SBA floor for an acquisition like this one is now 1.25x, up from 1.15x. Many lenders want closer to 1.35x before credit committee gets comfortable.
At the asking price:
Price $3,400,000 + closing costs $119,000 + working capital $150,000 = project cost $3,669,000
Buyer down payment (10% of project cost): $366,900
SBA loan: $3,302,100 over 10 years at an illustrative 9.75% (Prime plus 2.75%; the SBA cap on a loan this size is currently 10.00%)
Annual debt service: $518,180 ✓
DSCR using the listing advisor's SDE: $910,000 ÷ $518,180 = 1.76x
DSCR using what the lender underwrites: $615,000 ÷ $518,180 = 1.19x ✓
Same business, same loan. One version gets approved and the other gets declined.
Under the new rules, the lender also cannot use next year's projected growth to close the gap. Coverage has to come from the last fiscal year, or the average of the last two.
Test 3: Does the Price Survive an Appraisal?
An acquisition loan this size needs an independent business valuation. Total debt, including any seller note not on full standby, cannot exceed the appraised value.
The appraiser valued the business at $3,050,000, about 3.9x the QoE-verified SDE.
That leaves a $350,000 gap ✓ between the asking price and the appraisal. That gap can only be filled with buyer cash or a seller note on full standby. The lender cannot lend it.
Test 4: Is the Buyer Bankable?
The business can be perfect and the loan still dies here. The lender checked:
Ownership: 100% of the buying entity must be owned by U.S. citizens or nationals who primarily live in the U.S. or its territories. Green card holders have been ineligible since March 1, 2026.
Experience: 11 years running field crews and scheduling counts as transferable management experience.
Liquidity: after the down payment, the buyer still needs reserves. Lenders look for several months of personal expenses left in the bank.
Guarantee and collateral: anyone owning 20% or more personally guarantees the loan. Because goodwill is most of the price, business assets do not fully secure the loan, so the lender also takes a lien on the buyer's home, which has more than 25% equity.
The license: the master mechanical license is in the seller's name. The bank made a licensed qualifier on staff a condition of closing.
Test 5: Is the Revenue Durable?
This is where the deal scored well. 38% of revenue comes from maintenance agreements that renew every year.
The largest customer is 14% of revenue, under the roughly 20% level where many lenders start asking for contracts and consent letters. Revenue is seasonal, but the trough months still covered payroll in each of the last three years.
Three Versions of the Same Deal
We went back to the seller with the QoE and the appraisal. Not an opinion. The bank's own numbers.
At $3,050,000, closing costs fall to $106,750 (3.5% of price). With the same $150,000 of working capital, the project cost is $3,306,750, so the 10% minimum equity is $330,675.
Version 1: As listed. Declined.
Price: $3,400,000
Buyer cash: $366,900
Seller note: none
SBA loan: $3,302,100
Annual debt service: $518,180
Lender DSCR: 1.19x, below the 1.25x floor
Version 2: The seller wants his note paid monthly. Declined.
Price: $3,050,000
Buyer cash: $250,000
Seller note: $150,000 at 8%, paid monthly over 5 years ($36,498 a year)
SBA loan: $2,906,750
Annual debt service: $456,140 + $36,498 = $492,638
Lender DSCR: $615,000 ÷ $492,638 = 1.248x, just under the floor
A note that gets paid is not on standby, so it does not count as equity. That leaves $250,000 of buyer cash, 7.6% of the project, short of the 10% minimum. It also pushes total debt to $3,056,750, over the $3,050,000 appraisal.
Version 3: Final. Approved.
Price: $3,050,000
Buyer cash: $250,000
Seller note: $150,000 on full standby
SBA loan: $2,906,750
Annual debt service: $456,140 ✓
Lender DSCR: $615,000 ÷ $456,140 = 1.35x ✓
The final structure worked for three reasons:
The price matched the appraisal. $3,050,000, so no gap to fill.
The seller note sits on full standby. No payments until the SBA loan is repaid, so it adds nothing to debt service. It also counts toward equity: $250,000 cash plus the $150,000 note is $400,000, above the $330,675 requirement, and the note is under the $165,338 cap of half the requirement.
The seller stays involved. A paid consulting agreement keeps the owner on for the transition. The new rules allow up to 24 months.
The seller walked away with $2.9 million in cash at closing. That is $500,000 less than the asking price ($350,000 off the price and $150,000 deferred on the standby note), and $2.9 million more than a declined loan would have paid him.
One thing that was never on the table: an earnout. SBA loans still prohibit seller earnouts. If someone tells you to bridge a valuation gap with one on an SBA deal, they have not read the rules.
Finding the Deal Was the Easy Part
This business was easy to find. It was listed, its books looked clean by most standards, and the buyer liked it in the first meeting.
None of that got it financed. What got it financed was knowing what the bank would underwrite before the LOI was signed, and structuring the offer to fit.
Deal sourcing is the easiest part of buying a business. Underwriting, structure, and financing are where deals are actually won or lost. That is the work we do every day.
Looking at a deal and want to know if a lender will say yes?
Acquire Weekly | We don't find deals. We engineer them.