Many owners assume a buyer will simply write a check for the full purchase price. In practice, most acquisitions use a capital stack: third‑party debt (often bank/SBA), buyer equity, and frequently a seller note or earn‑out. Lenders underwrite historical, documented cash flow—not hopes, estimates, or aggressive projections.
Common financing killers
- Tax losses with no credible add‑backs. If tax returns show losses and add‑backs aren’t specific, verifiable, and non‑recurring, lenders will underwrite the loss—not the story.
- Turnaround situations with negative cash flow. Projections alone don’t satisfy underwriting. Without sustained, documented improvements in cash flow, debt service cannot be supported.
How to make a deal financeable
- Present clean, reconciled financials. Tie monthly P&Ls and balance sheets to filed tax returns. Provide a trailing‑twelve‑months (TTM) view to demonstrate trends.
- Build a defensible add‑back schedule. Identify owner compensation above market, discontinued expenses, and one‑time items. Support each entry with invoices, contracts, or other documentation.
- Show stable, repeatable cash flow. Lenders focus on the ability to service debt (free cash flow ÷ annual loan payments). Highlight seasonality and working‑capital needs so cash flow is realistic.
- Align pricing with bankable earnings. Valuation should reflect normalized, documented cash flow—not potential.
- Address concentration and key‑person risk. Mitigate with customer diversification, SOPs, and a clear transition/retention plan.
- Consider reasonable seller participation. A well‑structured seller note can improve bankability and signal confidence, while keeping total leverage in check.
- Eliminate compliance gaps. Open tax issues, expired licenses, and unresolved legal matters stall credit approval.
Bottom line: Strong, well‑organized, and provable cash flow opens the door to third‑party financing. If a sale is on the horizon in the next 12–24 months, start preparing the financial story now—so lenders, buyers, and advisors can all say “yes.”