A buyer values a business on what it will earn under their ownership: a multiple of adjusted EBITDA, often with growth and savings in view. A lender values it on what would get its money back if things go wrong: earnings in a bad year, the loan as a share of what the business would sell for then, and what the assets would fetch in liquidation. So the lender's number is lower, and it sizes the loan from its own view, not from the price. Whatever the price exceeds that loan by has to come from equity or junior capital.
- Buyer's question
- What will this business earn for me, and what is that worth?
- Lender's question
- If earnings fall, can the loan still be repaid or recovered?
- Earnings the lender uses
- Historical, adjusted only for what it can verify, then stressed
- Collateral view
- Liquidation value; goodwill counts for nothing
- What sets the loan
- Coverage and leverage on the lender's earnings, not the purchase price
Two valuations of the same company
A buyer's valuation is forward-looking and personal. It starts with adjusted EBITDA, applies a multiple that reflects the company's size, growth and risk, and often leans on what the buyer plans to do: raise prices, add a product line, fold it into a business they already own. The result is enterprise value, what the operating business is worth to own. A buyer who pays up for a company they believe in is making a reasonable bet with their own capital.
A lender's return is capped at interest and fees. It gets nothing from the upside, so it does not pay for it. What it cares about is the downside: whether the business can make its payments in a weak year, and whether the loan can be recovered by a refinancing, a sale of the company or, in the end, a sale of its assets. Its valuation work is a series of tests of that downside, not a second opinion on the price.
| The buyer | The lender | |
|---|---|---|
| Question asked | What is this business worth to own? | Can I be repaid if things go wrong? |
| Earnings used | Adjusted, often run-rate, sometimes with planned improvements | Historical, adjusted only for what can be verified, then stressed |
| Growth and synergies | Part of the price | Not credited until they show up in results |
| Multiple | What comparable companies sell for | What the business would sell for in a bad year |
| Balance sheet assets | Largely irrelevant to a price set on earnings | A second way out: liquidation value |
| Goodwill | Most of the price in a service business | Worth nothing if the business fails |
| Result | Enterprise value and purchase price | A loan size, and the equity required beneath it |
The lender's earnings: tested, then stressed
A lender begins where the buyer does, with adjusted EBITDA, but credits less of it. Add-backs need support. Pro forma and run-rate adjustments are usually credited only in part, if at all; see lending on run-rate EBITDA. A quality of earnings report is the main way to narrow that gap, because it replaces the lender's haircuts with tested figures.
Then the lender stresses the number. It looks at how far earnings fell in the last downturn, what happens if the largest customer leaves, and how much of the business depends on the owner who is selling. It subtracts the capital spending the business has to make to stand still, because that cash is not available for debt; see maintenance vs growth capex. The question at the end is simple: at the earnings of a bad year, can the loan still be paid, and could it be refinanced by someone else?
This is where industries separate. Recurring service contracts, a spread of customers and a record of steady margins through a recession earn a lender's confidence. Project work, one dominant customer or earnings that doubled in the last two years do not. Two companies with the same EBITDA and the same purchase multiple can get very different loans. Customer concentration alone can move the answer.
Loan to enterprise value, on the lender's numbers
Cash-flow lenders also look at their loan as a share of enterprise value. The buyer's equity sits beneath the loan and absorbs losses first; the bigger that cushion, the more the business can lose in value before the lender is exposed. But the lender does not measure the cushion against the purchase price. It measures it against what the business would sell for when things have gone wrong, which means lower earnings at a lower multiple.
Take a company with verified EBITDA of 1,000, bought at seven times, for 7,000. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, so the senior loan will fall somewhere between 2,000 and 3,500. Where it falls depends on the downside. Suppose the lender's stress case puts earnings at 750 in a bad year, and a buyer then would pay five times, not seven. The business would then be worth 3,750.
| Buyer's view | Lender's bad-year view | |
|---|---|---|
| EBITDA | 1,000 | 750 |
| Multiple a buyer would pay | Seven times | Five times |
| Enterprise value | 7,000 | 3,750 |
| A senior loan of 3,500, as a share of that value | Half | Nearly all of it |
| A senior loan of 2,500, as a share of that value | About a third | About two-thirds |
On the buyer's numbers, a loan of 3,500 looks conservative: half the price. On the lender's, it would be almost fully exposed in a bad year. That is the reasoning that pushes a lender toward the lower end of its range for a volatile business, and toward the top for one whose earnings have held up before. The purchase price does not enter the calculation except as the amount the buyer's equity has to cover.
A lender asks what the business is worth in a bad year. Paying more for it does not make it worth more then.
The collateral view: what the assets would fetch
Behind the cash flow, a lender looks at a second way out: selling the assets. Here it values each asset at what it would bring in an orderly liquidation, not at book value and not at what the buyer paid.
| Asset | How a lender values it | Typical treatment |
|---|---|---|
| Receivables | Eligible receivables only, net of old and concentrated balances | Asset-based lenders typically advance 80% to 90% of eligible receivables; more than 90 days past invoice is typically ineligible |
| Inventory | Net orderly liquidation value | Up to 85% of NOLV, or roughly half of cost |
| Equipment | Orderly liquidation value from an appraisal | A share of OLV, well below replacement cost |
| Owner-occupied real estate | Appraised value | Often financed separately, for example through SBA 504 |
| Goodwill and customer relationships | Nothing in liquidation | Lent against only on cash flow, or with an SBA guaranty |
In most lower-middle-market acquisitions, liquidation value covers only part of the loan. A service business may have little beyond its receivables. The uncovered part is lent on cash flow alone, which lenders sometimes call the airball. The larger it is, the more the lender leans on earnings quality, the buyer's equity and, on smaller deals, personal guarantees. Collateral coverage and net orderly liquidation value are explained on their own pages, and orderly liquidation value for equipment is compared with fair market value in OLV vs FMV.
Where SBA's valuation fits
SBA lending is where a formal valuation of the business is written into the lender's rules rather than left to its judgement. 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 from a qualified appraiser, and the loan for the purchase cannot exceed it. See SBA's business valuation requirement.
The valuation is a ceiling, not a target. It says what the business is worth; it does not say what it can repay. The lender still tests coverage: 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. What the SBA guaranty changes is the collateral view. Because SBA guarantees 75% of loans above $150,000, a lender can finance goodwill that has no liquidation value, and every owner of 20% or more personally guarantees the loan. The downside test on earnings does not go away.
Why the price does not set the loan
Put the pieces together and the loan comes from the lender's own numbers: coverage on verified, stressed earnings, leverage within its range, and a cushion of value beneath it in a bad year. The purchase price appears only at the end, as the total the loan and everything behind it have to add up to. If a buyer agrees a higher price, the loan does not grow with it. The difference is filled by the buyer's equity, a seller note, mezzanine debt or, outside SBA loans, an earnout.
That is why the lender's math belongs before the letter of intent, not after. A buyer who knows the debt a business will support knows how much of any price is theirs to fund; when a purchase price is too high to finance works through it. The same logic runs the other way for owners: how much debt a business can carry depends on its earnings and assets, not on what someone might pay for it.
Narrowing the gap between the two valuations
The gap between a buyer's value and a lender's is mostly a gap in evidence. The things that close it are the things a lender cannot see for itself:
- Tested earnings. A quality of earnings report or clean monthly financials that tie to the tax returns.
- A downside record. Results through the last weak period, by month, so the lender can see how far earnings actually fell.
- Evidence of recurring revenue. Contracts, renewal history, revenue by customer over several years.
- Capital spending, split. What it costs to maintain the business, separated from what was spent to grow it.
- Current collateral values. An AR aging by customer, an inventory report and, where equipment matters, an appraisal.
Transparent's lender package puts that evidence in front of the lender alongside the financing model, so each lender builds its downside case from the business's own record rather than from an assumption.
Common questions
- Will a lender lend against the price I agreed to pay?
- No. The lender sizes the loan from its own view of earnings, coverage and collateral. The price only sets how much equity and junior capital you need to fill the gap above the loan.
- If I pay a higher multiple, can I borrow more?
- No. A higher multiple raises the price, not the earnings the lender lends against. It usually means more equity, or a seller note, for the same loan.
- Why does a cash-flow lender care about liquidation value?
- It is the lender's second way out. If the business fails, what the assets fetch decides how much of the loan is recovered. The part of the loan not covered by collateral is lent on cash flow alone, and lenders set their terms accordingly.
- Does the SBA valuation decide the loan amount?
- It caps it. The loan for the purchase cannot exceed the independent valuation, but the lender still has to be satisfied on debt service coverage, so the loan can be well below the valuation.
- Do lenders use a multiple of EBITDA at all?
- Yes, as a leverage limit. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, measured on the EBITDA they credit, which is usually lower than the figure in the seller's marketing materials.