Bank Priorities vs. Buyer Priorities in Business Acquisitions
When financing the purchase of a business, it’s important to understand that banks and buyers are looking at the deal through very different lenses, and that difference drives how the deal is structured, what gets scrutinized, and ultimately whether a loan is approved or a deal closes.
Bank’s Priorities: Risk Mitigation & Collateral
Banks are primarily in the risk management business. Their main concern is protecting their capital. That means they typically prioritize:
- Collateral and Assets: Tangible assets (like equipment, vehicles, real estate, or inventory) can be repossessed or sold to minimize loss if the loan defaults. This is why asset-heavy businesses are more “bankable” than service firms with few hard assets.
- Repayment Ability (DSCR): Banks calculate the Debt Service Coverage Ratio to ensure the business can cover loan payments with a comfortable margin. But even here, they’re conservative, they use historical earnings, not projected ones, and often apply a haircut to seller add-backs.
- Personal Guarantees: Banks want the borrower personally on the hook. This is a form of emotional collateral.
- SBA Guarantees: Since most small businesses don’t have enough collateral to fully secure a loan, SBA loans become the go-to tool. The SBA guarantee mitigates the bank’s risk, not the buyer’s. The government covers 75-85% of the loan if it defaults.
In short, banks are focused on downside protection. If you fail, they want to know they’ll get most of their money back.
Buyer’s Priorities: Cash Flow & Return on Investment
Buyers, especially those planning to operate the business (owner-operators), have a different set of priorities:
- Sustainable Cash Flow: Buyers want predictable, recurring earnings. The #1 metric is often Seller’s Discretionary Earnings (SDE), because it reflects how much money the owner can take out of the business to pay debt and themselves.
- Growth Potential: Buyers look beyond historicals to see what they can do with the business. They want opportunity, through new products, expanded markets, operational improvements, etc.
- Transferability: Will the business continue to succeed after the owner exits? Are key employees in place? Are customers loyal to the brand or the individual?
- Financing Terms: A buyer might care less about the total price and more about how it’s paid. Can they get a low down payment? Favorable seller financing? Good SBA loan terms?
In short, buyers are focused on upside potential. They want to know the business can fund its own acquisition and generate a return beyond just breaking even.
The Disconnect
This difference in priorities can sometimes create a disconnect:
- A bank may love a business with $1M in equipment and $200K in cash flow.
- A buyer may love a business with $400K in cash flow and $20K in equipment.
But unless an SBA guarantee is involved, most banks won’t lend purely on cash flow. That’s why many deals in the lower middle market ($500K–$5M range) require SBA financing or some level of seller financing, to bridge that gap.
Takeaway for Sellers
- Understand that you’re selling cash flow, not just “a business.”
- Expect buyers to focus on earnings, and banks to focus on collateral.
- A strong deal structure often includes a combination of SBA financing and seller support (training, transition, and sometimes a small seller note).
