Often, but only at a loan size that reflects where earnings are heading. Lenders weight the trailing twelve months and the latest months more than older years, and size to the lower, current figure unless there is evidence the decline has stopped. They accept explanations that can be shown in the numbers, such as a one-time loss, a deliberate exit from unprofitable customers, or a seller who stopped working the business, but they want monthly results proving it. The gap to the price is usually closed by a price reset, more buyer equity or a larger seller note; SBA does not allow an earnout to the seller.
- What lenders size on
- Trailing twelve months and the latest monthly trend, not the best year
- SBA change of ownership from 1 October 2026
- At least 1.25x coverage on historical results
- Explanations that work
- Ones the monthly figures prove: a one-time loss, a deliberate customer exit, a recovery already under way
- Bridging the gap
- Price reset, larger seller note, more equity; an earnout only on conventional loans
- What kills the deal
- A decline still running in the latest months
Which earnings the lender uses
A lender looking at an acquisition reads three years of results and the current year to date, and builds the trailing twelve months, or TTM, from them. When earnings are steady or rising, the choice of year barely matters. When they are falling, it decides the loan. Lenders do not average a falling series to lift it, and they do not use the year the price was based on. They use the most recent twelve months, and then ask whether the most recent months within that are lower still.
The rules are moving the same way. SBA requires debt service coverage of at least 1.15x, and from 1 October 2026 a change of ownership must show 1.25x on historical results. Projections that assume a recovery cannot carry an SBA acquisition loan that the business's actual results do not. Conventional bank lenders commonly look for at least 1.25x as well, measured on the same recent figures.
The figures must also be current. Lenders want the target's latest full year, never an older one because it looked better, and a year-to-date P&L through the last month-end. A file that leads with a stronger prior year reads as an attempt to hide the trend, and it is the trend the lender will ask about first. Why tax returns and internal statements sometimes disagree, and which one lenders trust, is in seller financials versus tax returns.
| Pattern in the figures | How lenders usually read it |
|---|---|
| Falling across three years and still falling this year | Sized on the latest months, or declined; the buyer is being asked to finance a turnaround with cash-flow debt |
| One weak year, with recent months back near earlier levels | TTM with the recovery shown month by month; credit for the recovery depends on how long it has held |
| A drop in the latest year, flat since | Sized on TTM; the flat months are the argument that the decline has stopped |
| Revenue down, margins up | Consistent with dropping unprofitable customers, if customer-level figures show it |
| Revenue up, margins down | A pricing or cost question: have prices caught up with labor and materials costs yet? |
| Add-backs growing as earnings fall | Skepticism; lenders test every add-back and often commission their own review |
Explanations lenders accept, and what each needs
Every seller of a declining business has an explanation. Lenders hear the same few, and each one lives or dies on a particular kind of evidence.
| Explanation | Evidence that carries it | What undermines it |
|---|---|---|
| A one-time loss: a lawsuit, an uninsured claim, a bad debt, a failed project | Documents for the event, and general-ledger detail showing it does not recur | A different one-time item in each of the last three years |
| A deliberate exit from unprofitable customers or lines | Revenue and gross margin by customer, before and after; remaining customers steady or growing | Good customers leaving at the same time |
| A seller who stopped working the business | Falling sales activity with steady retention; a pipeline that dried up rather than customers who left | Hard to prove, and relies on the buyer's effort; lenders give credit only once results turn |
| A cost spike: labor, materials, insurance | Price increases already put through and holding in recent months | Price increases that are planned, not made |
| A lost major customer | None; this is not an explanation but a new baseline | Nothing to undermine; the lender sizes without that customer |
| An industry-wide downturn | Comparable businesses affected the same way, and signs of the cycle turning | A business falling while its market recovers |
Add-backs deserve particular care in a declining business. A seller whose adjusted earnings hold steady while reported earnings fall is often adding back more each year. Lenders test each one, as described in EBITDA add-backs, and a rising total is a reason for them to look harder, not a reason to lend more. The seller who stopped working the business is common in sales by retiring owners; how lenders approach those deals is in buying a business from a retiring owner.
Evidence that the decline has stopped
The explanation says why earnings fell. What gets a loan made is evidence they have stopped falling. That evidence is monthly, not annual.
- Monthly P&Ls side by side for the current and prior years, so each month compares with the same month a year earlier and seasonality does not disguise the trend.
- Revenue and margin by customer, showing which customers drove the decline and that the rest are holding.
- Forward indicators: backlog, bookings, signed contracts, renewal rates, whatever the business has that shows next quarter before it happens.
- Proof of any actions taken: the price increase in the invoices, the cost cut in the payroll, the replacement salesperson on the payroll and producing.
Diligence will test all of it. From 1 October 2026 (SOP 50 10 8.1), SBA requires financial due diligence on every change of ownership, and a quality of earnings report on acquisitions of $3 million or more excluding real estate. A declining business is exactly where that work earns its cost, and a buyer who commissions it early learns the real baseline before the price is fixed. See quality of earnings for acquisition loans. Where recent months are genuinely stronger, some lenders will give weight to a run-rate figure, within limits described in lending on run-rate EBITDA.
Lenders size to where earnings are going. A story explains the decline; only the latest months can show it has stopped.
How big the gap is
A worked example in plain numbers. A business earned 1,400 three years ago, 1,250 last year, and 1,050 over the trailing twelve months, and the latest months are running at about the same pace. The buyer and seller agreed a price based on last year's 1,250.
| Basis | Earnings | Debt payments supportable at 1.25x |
|---|---|---|
| Last year, which the price was based on | 1,250 | 1,000 |
| Trailing twelve months, which the lender uses | 1,050 | 840 |
| Difference | 200 | 160 |
At the same rate and term, the loan the lender will make shrinks roughly in step with the supportable payment, here by about a sixth. And that assumes the lender is satisfied the decline has stopped at 1,050. If the latest months are lower still, it will size lower again. The whole difference has to come from somewhere other than the senior loan. The sizing method is in how much debt a business can carry.
On an SBA loan there is a second limit. Where the amount financed, less appraised real estate and equipment, exceeds $250,000, or buyer and seller are related, SBA requires an independent business valuation, and the loan for the purchase cannot exceed it. A valuation of a business with falling earnings will reflect the fall. See SBA's business valuation requirement.
Structures that bridge the gap
| Structure | How it closes the gap | On an SBA loan | On a conventional loan |
|---|---|---|---|
| Price reset | The price comes down to what current earnings support | Often needed anyway: the loan for the purchase cannot exceed the independent valuation, which will reflect the decline | The cleanest answer where the decline is real |
| Larger seller note | The seller finances more of the price and shares the risk | Counts toward the equity injection only on full standby for the life of the loan, and for no more than half of it; otherwise it is debt and counts in coverage the business may not have | Subordinated to the senior loan; its payments count in coverage |
| Earnout | Part of the price is paid only if earnings recover | Not allowed: SBA prohibits an earnout to the seller in a change of ownership it finances | Possible, subordinated and limited by the loan's covenants |
| More buyer equity | The buyer funds the difference | Adds to the 10% minimum | Lowers leverage, which lenders read well |
| Seller transition | The seller stays on to hand over customers | Consulting up to 12 months; up to 24 months under SOP 50 10 8.1 from 1 October 2026 | Negotiated freely |
A seller note that shrinks if earnings miss a target is an earnout by another name, and SBA lenders commonly treat it as one. On conventional deals, earnouts and seller notes are compared in earnout versus seller note and covered in earnouts and acquisition debt. How much seller financing a lender will accept is in how much seller financing.
Where the decline is still running, cash-flow lenders will usually decline, and a buyer should be wary of a deal that needs one. Some asset-based lenders lend against receivables and inventory with less weight on earnings, as described in asset-based lending for unprofitable companies, but that finances working capital, not a price built on better years.
Presenting a declining business to lenders
The worst way to present a decline is to let the lender find it. A file that leads with the trend, gives the explanation with its evidence, shows the monthly figures that prove it has stopped, and sizes the loan on the current baseline gets read as an honest credit. One that leads with the best year gets read as a sales document, and the lender discounts everything in it.
Transparent does not take a file to lenders on older-year figures or incomplete ones. The financing model is built on the latest full year and the year to date, with the monthly trend laid out, and the underwriting memo states the decline and the evidence on the first page. Once the documents are in, the package is built in a day, and the book of 1,800+ lenders includes lenders comfortable with a business that has had a bad year and recovered. Why acquisition loans get declined, including on this point, is in why acquisition loans get declined, and what goes in the package in the lender package.
Common questions
- Will a lender use the better prior year if this year was a one-off?
- Not directly. Lenders size on the trailing twelve months. If a one-time loss caused the dip and can be documented, lenders may add it back to the recent figures, which brings the result closer to the earlier year, but they will not simply substitute the older year.
- Can I use an earnout to bridge the gap on an SBA loan?
- No. SBA prohibits an earnout to the seller in a change of ownership it finances. On an SBA deal the gap is usually closed with a lower price, more buyer equity, or a seller note, which counts toward the injection only if it is on full standby for the life of the loan, and then for no more than half of the required amount.
- How much recovery do lenders need to see?
- There is no fixed number of months. Lenders want enough monthly results, compared with the same months a year earlier, to be confident the trend has turned rather than paused. The more seasonal the business, the more of the year they want to see.
- Will a quality of earnings report help?
- It helps when the decline has a real, documentable cause, because it gives the lender an independent baseline. From 1 October 2026, SBA requires financial due diligence on every change of ownership and a quality of earnings report on acquisitions of $3 million or more excluding real estate.
- Should I renegotiate the price?
- If the price was set on a year the business no longer earns, usually yes. The lender will size the loan on current earnings, and on an SBA deal the valuation will reflect the decline too, so the gap has to be closed somehow, and a price reset is often the cleanest way.