7 minute read

When Financing Derails the Deal

There are myriad ways a deal can fall apart between a signed LOI and the closing table. Lease assignments that drag for months, sellers or buyers who get cold feet once the transaction becomes "real," key employees who announce they're leaving mid-due diligence. But of all the reasons I've seen acquisitions stall or die, financing failure is among the most common and the most preventable. Unlike some deal-killers that come out of nowhere, financing problems almost always telegraph themselves early. Understanding how to read those signals — and what brokers do to get ahead of them — can mean the difference between a deal that closes and one that doesn't.

Most people assume that once a buyer is "pre-qualified" and an LOI is signed, the financing is essentially handled. In reality, that's often where the hard part begins. SBA lenders aren't rubber stamps. They're underwriting the business, the buyer, and the deal structure simultaneously, and if any of those three legs don't hold up, the loan doesn't close. Here's what commonly creates financing problems in the Main Street space, and how a good broker works to get ahead of it.

The Buyer Isn't as Ready as They Think

Buyer readiness is one of the first things experienced brokers pressure-test, ideally before a seller ever takes a call with a prospective buyer. A buyer saying "I'm pre-qualified" doesn't tell you much. Pre-qualified by whom, under what terms, and for what deal size?

• Liquidity shortfalls. SBA 7(a) loans typically require a buyer to inject 10% of the total project cost in cash, but "total project cost" includes more than just the purchase price. It can include working capital, closing costs, and lender fees. A buyer who has almost $100K for a $1M deal may fall short once the full picture is drawn. I've had buyers come to the table genuinely believing they were funded, only to discover they were light when the loan package was assembled.
• Credit issues that surface late. A buyer's credit score is pulled early in the process, but the full credit picture, including judgments, collection accounts, prior bankruptcies, student loan delinquencies, and home loans, often doesn't fully surface until underwriting is underway. One judgment a buyer "forgot about" can pause a deal for weeks or kill it entirely.
• Experience mismatch. Most SBA lenders care whether the buyer can actually run the business they're acquiring. If a buyer with a corporate background is purchasing a skilled trades company, some lenders will want to see a management plan, a key employee retention strategy, or a licensed operator staying on. If the buyer can't demonstrate relevant experience or a credible transition plan, certain lenders will decline regardless of how strong the financials are.

The Seller's Financials Don't Tell a Clean Story

The seller's financials are the foundation of the entire deal. Valuation, loan sizing, and debt service coverage all flow from the same numbers, and if those numbers don't hold up under scrutiny, financing becomes a problem.

• SDE add-backs that don't survive underwriting. Seller’s Discretionary Earnings is the standard measure of cash flow for Main Street deals, but not everything a seller classifies as an add-back will be recognized by a lender. Personal vehicle expenses, owner life insurance, one-time legal fees — these are reasonable add-backs in a valuation conversation. But if an add-back is recurring, lacks documentation, or looks discretionary to an underwriter, it may get stripped out. When that happens, the SDE drops, the supportable loan amount drops, and suddenly the deal is priced above what a lender will finance. Every bank views add-backs a little differently, which makes this even harder to predict.
• Messy books / financials. Tax returns and P&Ls that don't reconcile with each other are a red flag for lenders. I've worked with sellers whose accountant filed aggressive returns for tax minimization, which makes sense for tax purposes but means the business looks less profitable on paper than it actually is. We can work through that in a CIM with proper normalization, but if the seller can't explain discrepancies or provide supporting documentation, lenders get uncomfortable fast.
• Inconsistent revenue & profit trends. Lenders look at trailing twelve months, the prior two years of tax returns, and trends. A business that showed $800K in SDE two years ago but is trending toward $600K this year will get underwritten closer to $600K, or the lender may decline if the decline can't be explained. A good broker gets ahead of this by helping the seller document the story or recommending they hold onto the business longer to stabilize cash flows.

The Deal Structure Doesn't Support the Debt

Even when the buyer is qualified and the financials are clean, deals can still stall because the structure itself doesn't pencil for a lender.

• Debt Service Coverage Ratio is the ratio of business cash flow to total annual debt payments, and most SBA lenders want to see at least 1.25x on the most recent tax return, meaning the business generates $1.25 for every $1.00 in annual debt obligations. Experienced brokers run a DSCR and other lender checks as part of the first step in evaluating a business to ensure it will pencil for the banks. If the seller's ask implies a DSCR below 1.25x at current financing terms, that pricing conversation happens before going to market, not after a buyer falls out of underwriting two months into a deal.
• Working capital shortfalls. Many buyers focus entirely on the acquisition price and underestimate how much working capital they'll need on day one. SBA lenders will often require a working capital injection as part of the loan package. If that hasn't been factored into the buyer's equity injection, the loan amount increases, and if the buyer doesn't have additional liquidity, the deal stalls at exactly the wrong moment.
• Lender mismatch. Not all SBA lenders approach every deal the same way. Some specialize in certain industries or deal sizes, and a lender who primarily does franchise acquisitions may be far less comfortable with an owner-operated service business that has no hard assets. Matching the deal to the right lender, and sometimes introducing a preferred lender partner early in the process, is something a broker can do to meaningfully reduce friction and improve closing probability.

How Advisors Try to Get Ahead of It

A good broker's job isn't just to find a buyer. It's to help deals actually close smoothly and on time, and that means doing pre-market work that most sellers don't realize is happening behind the scenes.

Before a business goes to market, brokers often reconstruct SDE with full documentation so every add-back is defensible before a lender ever sees it. A preliminary DSCR is run at expected financing terms so pricing decisions are made with the debt structure in mind, then taking it to a broad group of lenders to sanity-check assumptions against current pricing, interest rates, and any SBA changes. Buyers are pre-qualified on liquidity, financing plan, relevant experience, and timeline before receiving access to confidential information and lender sensitivities are flagged early to avoid surprises during underwriting. When a deal is priced at the edge of what the SBA will fully finance, a small seller note may be recommended as a bridge, which signals seller confidence, reduces lender exposure, and can make a deal work that wouldn't otherwise qualify.

The Bottom Line

Financing failure is predictable more often than people realize. The issues that derail transactions in the Main Street space, whether underprepared buyers, financials that don't survive lender scrutiny, or deal structures that don't service the debt, almost always have warning signs that show up early if you know what to look for. That's the work a broker is doing in the background: not just marketing the business, but stress-testing the deal before a lender ever touches it. Getting there takes work upfront, but it's almost always worth it.

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