How lenders decide what a business is worth financing
Acquisition lenders care less about the asking price than about whether the business's cash flow can cover the loan payment, a reasonable salary for you, and its existing obligations. Sellers often present adjusted earnings with add-backs, such as personal expenses run through the business. Expect lenders to question each add-back and to discount any that are not well documented.
Pay attention to how much of the profit depends on the current owner. If the seller works 60 hours a week without a salary, or personally holds the key customer relationships, the true earnings available to a new owner may be lower than the financials suggest. Many lenders require or recommend an independent business valuation, especially where goodwill is a large share of the price.
Due diligence issues that slow or stop acquisition loans
The most common problem is financials that do not match. If the seller's tax returns show less income than their internal profit and loss statements, lenders generally rely on the tax returns. Unreported cash revenue does not count. Other common issues include heavy reliance on one or two customers, a lease that cannot be assigned or is close to expiring, licenses or contracts that do not transfer, and key employees who may leave after the sale.
To keep things moving, collect the seller's business tax returns and interim financials, the letter of intent or purchase agreement, the lease, your own resume and personal financial statement, and a summary of how you plan to run the business.
Structuring seller notes and leaving cash after closing
A seller note can bridge part of the price and keeps the seller invested in a smooth transition. Lender rules on seller notes vary, and SBA requirements on whether and how a seller note can count toward your equity have changed over time, so ask the lender for current rules before you finalize terms with the seller.
Do not put every dollar you have into the down payment. You will need working capital after closing for payroll, inventory and surprises. Negotiate a transition and training period and a reasonable non-compete with the seller as part of the deal.