Sometimes there are three parties evaluating a business: The seller. The buyer. And the lender.
A buyer may like the company and agree on a price, but if outside financing is required, the transaction must also work within the lender's underwriting requirements.
What financing evaluates
A lender looks beyond buyer enthusiasm.
- Historical cash flow
- The consistency and evidence behind past performance.
- Normalized earnings
- The supportable earnings expected to remain under new ownership.
- Debt-service capacity
- Whether projected cash flow can reasonably support required debt payments.
- Buyer equity
- The capital the buyer contributes to the transaction.
- Buyer qualifications
- Relevant experience, financial capacity and ability to operate the business.
- Documentation and structure
- The records and deal terms used to evaluate the credit.
- Collateral where relevant
- Available business or personal collateral considered under the applicable lending structure.
Aggressive add-backs or unsupported earnings can become especially problematic when financing is introduced. A lender must be able to understand and substantiate the cash flow used in underwriting.
Two different questions
Value and financeability are connected, but not identical.
Valuation asks
- What may the business be worth?
Financeability asks
- Can this particular transaction support the capital required to acquire it?
Seller financing or other structures may sometimes be part of a transaction, but they do not solve every financing gap and can change the seller's risk.
A buyer's willingness to pay and a buyer's ability to close are two different things.
Evaluating financeability earlier can identify documentation, structure or expectation issues before they surface late in a transaction. No discussion of financeability is a promise of SBA eligibility or lender approval.