In SMB acquisitions, plenty of targets look great to a buyer: solid headline EBITDA, promising growth, fair multiple. Then the lender model lands and the deal stalls. The gap is the difference between a good deal and a financeable deal. Lenders underwrite cash flow stability, debt service coverage, and working capital reality. If earnings do not translate into predictable, timely cash, credit will not lean in, no matter how attractive the price looks to you.
Here is how to see your target the way lenders do, tighten your model, and shape terms that clear credit without killing the thesis.
What lenders actually buy
Banks do not buy upside. They buy reliable cash conversion that pays them back on time. Their lens is narrower than yours:
- Cash flow stability: recurring mix, renewal risk, seasonality, and speed of cash collection
- DSCR: most SBA and conventional lenders want pro forma coverage near 1.25x in a realistic base case
- Working capital needs: cash required to run the business or unwind timing games
- Earnings to cash bridge: how Adjusted EBITDA becomes debt service after replacement labor, maintenance capex, taxes, and timing of AR and AP
Why “good” is not always “financeable”
Attractive deals fail credit for predictable reasons.
- EBITDA that is not operational: add-backs depend on costs you cannot avoid, like hiring a GM or reinstating marketing
- Concentration and transfer risk: one large at-will customer can sink coverage if they churn or reprice
- Spiky working capital: stretched AP and pulled-forward AR make recent months look strong but do not last
- Cash vs. accrual: billings presented as revenue or big prepaids that flatter the P&L without helping near-term cash
Translate your model into a lender’s model
Think in four steps: EBITDA to operating cash to debt service to DSCR, with timing layered in.
Step 1: Normalize EBITDA
Price the roles you will actually hire. Reverse savings that must return, like marketing or maintenance. Align revenue recognition with delivery and remove one-time items.
Step 2: Convert EBITDA to operating cash
Subtract a realistic maintenance capex number. Add or subtract a normal working capital change for the year, not a flattering month. Include owner salary if you will be on payroll.
Step 3: Add the actual debt profile
Lay out senior interest and principal by month or quarter, plus any seller note payments and required reserves. Add taxes if you modeled pre-tax EBITDA.
Step 4: Calculate DSCR and identify pinch months
DSCR equals operating cash divided by total debt service. Build a simple 13-week cash view for the first six months after close to catch timing crunches.
If base-case DSCR is barely 1.25x and dips below 1.0x in a few months, expect pushback or plan to fix it with structure.
A quick example
- Seller Adjusted EBITDA: 1.2M
- Normalization: backfill owner comp 90k, reinstate marketing 60k
- Normalized EBITDA: 1.05M
- Maintenance capex: 80k
- Normal working capital use: 100k
- Senior debt service: 700k per year
- Proposed seller note: 120k per year
Operating cash: 1.05M − 80k − 100k = 870k
Total debt service: 820k
Base DSCR: 1.06x, not financeable as proposed
Make it financeable
- Shift 300k of value into an interest-only seller note for year one, then amortize
- Trim cash at close by 200k and add a small earnout tied to gross profit from named accounts
- Senior debt service drops to 630k, seller note year-one service to 60k
- New DSCR: 870k ÷ 690k = 1.26x, with better month-to-month breathing room
Lender concerns and how to address them
- Cash conversion: provide AR aging, inventory turns, and AP cadence for 12 months; show a trailing peg with collar and true-up
- Concentration: disclose the largest and top-three percentages, contract terms, and relationship owners; propose structure that ties dollars to retention
- Deferred revenue: share a rollforward; exclude DR from the peg and apply a cost-to-fulfill percentage as a closing adjustment if material
- Add-backs: deliver a schedule with documents and replacement-cost logic
- Capex: include a maintenance capex view so no one is surprised by near-term replacements
Working capital, the silent deal killer
A fair price can still produce a rough first quarter if the peg is wrong.
- Define working capital early as AR plus inventory minus AP on an accrual basis, with clear inclusions and exclusions
- Use a trailing 12-month average, adjusted for obvious anomalies
- Clean the inputs: discount aged AR, mark down obsolete stock, and normalize stretched AP
- Put the formula, method, collar, and true-up in the LOI
Structure that turns good into financeable
- Seller financing: lowers day-one debt service and aligns incentives; confirm subordination with the bank
- Targeted earnouts: use simple, auditable metrics such as revenue or gross profit from named accounts
- Holdbacks or escrows: reserve for bounded exposures like tax or contract gaps
- Amortization and covenants: propose schedules that reflect seasonality and covenants tied to validated EBITDA and the normalized peg
Pre-LOI request list that saves months
- Top-10 customers for 24 months with terms, renewal dates, and relationship owners
- Monthly P&Ls for 24 months on an accrual basis or a bridge if cash-basis
- AR aging, inventory report, and recent AP detail
- Seller add-back schedule with brief rationales and documents
- Deferred revenue rollforward if applicable
- Basic capex history for maintenance versus growth
If a seller will not provide this, you may not have a financeable deal.
Common buyer pitfalls that credit will flag
- Treating owner labor as free after close
- Assuming recent growth continues without proving gross margin and retention
- Ignoring maintenance capex because depreciation is non-cash
- Setting the peg off a flattering month and planning to “fix it later”
- Counting deferred revenue as cash without acknowledging delivery cost
- Presenting only one case to credit instead of base and downside
Package your deal for the lender you want
Make it easy for underwriting to say yes.
- One-pager: model, revenue mix, concentration snapshot, and why you are a fit operator
- Financial exhibits: seller versus validated EBITDA, TTM working capital peg with collar and true-up, maintenance capex view, DSCR bridge
- Risk and structure memo: pair each risk with the tool that addresses it, such as note, earnout, escrow, or transition agreement
- Post-close plan: 90-day priorities that protect cash flow and stabilize the operation
Buyer checklist: is your good deal financeable?
- Normalized EBITDA reflects replacement labor and reinstated spend
- Maintenance capex and taxes modeled, not just EBITDA
- TTM peg defined, scrubbed, and in the LOI with a collar and true-up
- Concentration priced into the multiple and shared via structure
- Deferred revenue treated properly outside the peg with cost-to-fulfill if needed
- DSCR at or above about 1.25x in base case, with monthly cash cadence checked
- Lender sees exhibits early, and seller note terms are pre-cleared for subordination
- Transition support documented so owner dependency does not become your problem
Closing thought
A good deal makes sense to you. A financeable deal also makes sense to your lender. If you build your case around cash conversion, a clean peg, realistic DSCR, and structures that share real risks, credit will follow. You will step into an acquisition that performs where it counts most: when the debt payment is due.
Contact us today or book a free consultation and learn how we can be a trusted partner on your next deal!
