Writing · Financeability

What a lender actually reads.

Three years of tax returns, the bank deposits, and one division problem. Here is what a buyer's bank looks at, in the order it looks at it — and what you can fix now.

When somebody buys your business, he is usually not the one deciding. His bank is.

About 78% of buyers in the $2M to $5M range expect to use SBA money. So the real reader of your company is a loan officer you will never meet, working from a file, following a checklist. He is not hostile. He is just not going to take your word for anything.

Here is what he reads, in order. The order is the useful part, because most owners think it starts with the profit and loss statement. It does not.

1. Three years of tax returns

Not your books. Your returns. Because you signed them, and because a return that overstates income costs you money in tax — which makes it the one document with a reason to be honest.

What this means in practice: if you have spent 20 years keeping taxable income down, that is the number a bank will lend against. Every dollar you legally pushed off the return is a dollar that is not there when you need it to be. That is not a criticism of you or of your accountant. It is a timing problem, and it takes two or three tax years to change.

2. Your bank deposits against your top line

He will run the deposits against the revenue you reported. Your statement says $2.1M. The deposits say $1.9M.

He believes the deposits. And now every other number you have shown him is suspect — not just that one. This is the single fastest way to lose credibility in a file, and it is almost always a bookkeeping problem rather than anything worse. Somebody netted refunds against sales, or ran a line of credit through the wrong account, or recorded a job twice.

Fix it before anybody looks. Reconcile 12 months of deposits to reported revenue and be able to explain every difference in one sentence.

3. The coverage test

This is the whole ballgame, and it is one division problem.

He takes your cash flow and divides it by the annual loan payment. He wants an answer between 1.25 and 1.50. Below that, the loan does not get made.

Here is how he gets to your cash flow. Start with net income from the return. Add back interest, and add back depreciation. Add back one owner's reasonable pay — one, not two, and reasonable means what he would have to pay somebody to do that job. Then subtract what it would cost to replace anything you do for free. Then subtract the equipment spending the business genuinely needs each year.

An example of the arithmetic, with a made-up payment so you can see the shape of it. Say the annual payment on the loan comes to $220,000. At 1.25 coverage, he needs to see $275,000 of provable cash flow. At 1.50, he needs $330,000. Ask your banker what the payment would be on the loan size you have in mind, then do the division yourself. It is the most useful ten minutes you will spend on this subject.

Provable is the word doing the work. Not earned. Proved.

4. Your add-backs, one at a time

Add-backs are the personal costs running through the business that a new owner would not have. The truck your wife drives. The trip to Cabo that was a customer trip. The kid on the payroll.

The rule is simple and it is not negotiable. An add-back with paper behind it is an add-back. An add-back with a story behind it is a haircut. If you cannot hand over an invoice, a bank statement line and a one-sentence explanation, assume it will be thrown out.

The better move is to stop having them. Two clean years, with personal spending out of the business, is worth more than any amount of arguing about a schedule of add-backs. It is also the version where you are not asking a stranger to take your word for $60,000 of expenses.

5. The org chart

There is a box on a credit memo that amounts to: is there an operator besides the seller?

When that box is empty, it is a reason to decline the loan. Not a reason to lend less. This is the point owners miss most often, because it feels like the kind of thing that should show up as a lower price. It does not. It shows up as a no.

What fills the box: somebody besides you who prices work, holds the customer relationships, and can run the place for a month. Ideally somebody who already has, and can say so.

6. Your customers, counted

Top customer and top three, as a share of the last 12 months of revenue. Above roughly 15% to 25% in one customer, plenty of lenders and buyers stop. Above 30%, most do.

The bank's reasoning is the same as the buyer's, only stated as risk: if that account leaves in year one, the loan payment does not.

7. The collateral, and the part nobody explains

Here is the mechanic that catches sellers out, and it changed recently.

Under the SBA's rules effective 1 June 2025, the lender takes the total amount being financed — including any money you are lending the buyer yourself — and subtracts the appraised value of the real estate and the equipment. What is left over is goodwill. If that goodwill figure is $250,000 or less, the lender can value the business in-house. Above $250,000, an independent appraisal is required, the lender must order it for its own use, and a valuation prepared for the seller cannot be used.

On a $2M sale of a service business with leased premises, the goodwill is well over a million dollars. Which means the number your deal has to survive is set by an appraiser you did not choose and cannot instruct. That is the single best argument for doing the books work before you list rather than after.

8. The fee, and one exception worth knowing

The government charges a fee to guarantee the loan. For the 2026 fiscal year, effective 1 October 2025, it runs like this on the guaranteed portion:

That last line is worth real money. Machine shops and a good many oilfield fabricators sit in the manufacturing codes — NAICS 31 through 33. A machine shop financed at $950,000 or less carries no guaranty fee at all. Against a plumbing company at the same price, that is roughly a $26,000 swing. Your buyer pays it, which means it comes out of your price.

What to do about all of this, starting now

1. Reconcile deposits to revenueTwelve months, every difference explained in one sentence. Do this first because it is the cheapest and it protects everything else.
2. Close the books inside 15 days of month endEvery month, on time. A bank reads consistency as control.
3. Take personal spending outStarting with this tax year, so you have two clean years when it matters.
4. Split margin by line of workService against install, commercial against residential. This is the report that makes a lender relax, because it shows somebody is steering.
5. Name an operator besides yourselfAnd get him doing the pricing, on paper, with a date.
6. Count your top customerAnd start the slow work of getting the share down.

Twelve to 24 months of that, and the file reads differently. Not because anything was dressed up — because the same business is finally provable.

One last thing. Owners treat this as the buyer's problem to solve at the end. It is not. Your file is what decides how many buyers can even get to the table, and that gets decided long before anybody makes an offer.

I do not give tax or legal advice and I do not provide a valuation of record. Your CPA, your attorney and a certified appraiser do that work. What I do is get the business to the point where their work is short.