Should you talk to a lender before signing an LOI?

The mistake an early read prevents

Many buyers set their offer the way sellers set their asking price: a multiple of earnings that sounds right for the industry, adjusted for how much they want the business. The financing comes later. They sign the LOI, open diligence, and only then ask a lender what it will lend.

The lender's answer comes from a different calculation. It starts with the cash the business produces, subtracts what it needs to keep running, and asks how much debt that cash can repay with a margin to spare. That number has no reason to match the price. When it is lower, the buyer discovers the gap after committing to a number, with a seller who expects that number and a diligence budget already spent.

A worked example, in plain numbers. The buyer agrees a price of 10,000, planning to borrow 8,000. The business produces cash available for debt service that, at the lender's coverage test, supports a loan of about 6,500. The missing 1,500 now has to come from the buyer's own equity, a larger seller note, or a price cut the seller has to be persuaded to accept. In an SBA deal it cannot come from an earnout, because SBA prohibits an earnout to the seller in a change of ownership it finances. Had the buyer known the 6,500 first, the offer could have been written around it.

The price is the one term you cannot easily change after the LOI. Learn what the business can borrow before you write it down.

What a lender can tell you before the LOI, and what it cannot

An early read is not an approval, and a buyer who treats it as one will be disappointed. It is a well-informed estimate from someone who underwrites these deals, based on the figures available before diligence. The line between what it can and cannot tell you is fairly consistent.

The right-hand column is why the LOI should still carry a financing contingency. The left-hand column is why that contingency can be specific instead of a vague "subject to financing".

The deal-breakers an early read catches

Some problems cannot be fixed by negotiation once the LOI is signed, because they are rules, not preferences. A lender can usually spot them from the draft terms and a year of figures:

• The seller wants to stay. In an SBA complete change of ownership the seller may not stay on as an owner, officer or employee; the seller may consult for up to 12 months, or up to 24 months under SOP 50 10 8.1 from 1 October 2026. A seller expecting a salaried role or a retained stake needs a different structure.
• Part of the price is an earnout. SBA prohibits an earnout to the seller in a change of ownership it finances. Conventional lenders may accept one if it is subordinated; see earnouts and acquisition debt.
• The seller note is meant to count as equity but has payments. On an SBA loan a seller note counts toward up to half of the required injection only on full standby for the life of the loan. A paying note is debt and counts in coverage.
• The deal is too big for the program. SBA 7(a) loans go up to $5 million. A buyer planning on SBA for a larger deal needs a different lender or a smaller loan; see acquisitions above the SBA limit.
• The coverage does not work on history. SBA requires at least 1.15x; from 1 October 2026 a change of ownership must show 1.25x on historical results, and change-of-ownership loans amortize over no more than 10 years except the real estate share. A deal that only works on projected growth will not pass.
• The price is above what a valuation will support. Where the amount financed, less appraised real estate and equipment, exceeds $250,000, SBA requires an independent valuation and the loan cannot exceed it.
• One customer is the business. Heavy customer concentration changes how much any lender will lend, and some will not lend at all.

How an early read makes the LOI stronger

Buyers sometimes worry that bringing a lender in early slows them down or signals weakness. The opposite is usually true. An LOI written around a lender's early read is a better offer for both sides.

• The price is financeable. The offer is set at a level the debt, the buyer's equity and the seller's paper can actually fund, so the seller is less likely to face a re-trade later.
• The structure is written in. The LOI can say how much is paid at closing, how much is a seller note and on what terms, and whether the note is on standby. Sellers accept terms more readily at the LOI stage than as a surprise in diligence.
• The financing contingency is specific. It can name the loan type, the amount, a rate ceiling and a realistic outside date. A seller reads that as a buyer who knows how the deal gets funded.
• Diligence is focused. The buyer knows in advance what the lender will test, such as the quality of earnings on SBA acquisitions of $3 million or more from 1 October 2026, and can scope it from day one.
• Competing offers. Where a seller has several bidders, the buyer who can explain exactly how the price is financed often wins over a higher number that is not.

What to share for a useful early read

A lender's read is only as good as the figures behind it. Before an LOI, most sellers will share enough under an NDA:

• The target's latest full year of figures, never an older year, and year to date if it is available
• Two to three years of the target's business tax returns, or the seller's financial statements if the returns are not yet shared
• The target's balance sheet and a list of its existing debt, which will usually be paid off at closing
• The draft deal terms: price, what is being bought, the seller note, any earnout, and the seller's intentions after the sale
• The buyer's own position: resume, personal financial statement and where the equity will come from

The full list for the formal application is on what lenders need to finance an acquisition. For the early read, the latest year of figures and the draft terms carry most of the weight.

One lender's read, or several

A single bank's early read tells you what that bank will do. It does not tell you what the market will do. Lenders differ widely in how they treat the same business: one may see an SBA deal where another sees a conventional loan, and private credit funds will often go where banks will not, at a price. A buyer who prices an offer on one lender's appetite may leave value on the table, or build on a lender that later loses interest.

Transparent's lender book holds 1,800+ lenders, including 278 that write SBA 7(a) and 504 and 1,148 that write term and private credit. Before an LOI, we read a deal the way those lenders will and tell the buyer where it fits, what it will support and what would stop it. Once the documents are in, the full package — financing model, lender presentation, blind teaser and underwriting memo — takes a day to build. We charge nothing before a loan closes. For what comes after the LOI, see the acquisition financing process, step by step and term sheets and commitment letters.