Over the past several weeks, we’ve walked through the SBA loan process from application through closing and post-close liquidity. Today, we’re shifting gears. This issue kicks off a new series focused on deal risks and the patterns we see that trip up buyers before they ever get to the closing table.

We’re going to walk through this one with a detailed case study: Two fictional buyers, same business type, same purchase price, two very different outcomes.

Please Note: The buyers, businesses, and deal scenarios described in this newsletter are entirely illustrative and hypothetical. They are not based on any real transactions, clients, or acquisition targets. The financial figures, add-back schedules, lender decisions, and outcomes are fictional examples created for educational purposes to demonstrate how SBA lenders evaluate deal risk.

Upcoming Webinar:

Buy-Side Due Diligence & SBA Lending (plus Live Q&A)

I’m co-hosting a live webinar with Chris Barrett from Midwest CPA this Wednesday, March 4th at 12:00 PM CST. We’ll be breaking down how SBA lenders evaluate financial due diligence, how add-backs get scrutinized in underwriting, and how to structure your deal to get to the closing table. If you’re actively evaluating an acquisition, this one’s worth your time.

​Register here​

The Setup: Two Buyers, One Business Type, Same Price

One of the most common (and costly) mistakes we see acquisition entrepreneurs make is structuring a deal around a seller’s best year of earnings, compounded by a financial profile loaded with add-backs.

It’s a combination that creates problems on multiple fronts: in your financing, in your due diligence costs, and ultimately in your post-close performance.

To illustrate how dramatically this plays out in practice, let’s look at two fictional business buyers: Sarah and Kevin.

Each are targeting a commercial janitorial services company in the same metro area.

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Both buyers had strong professional backgrounds.

Sarah spent 12 years managing operations for a national facilities management firm.

Kevin ran business development at a mid-size commercial real estate company.

Both were sharp. Both were well-prepared.

But only one was buying a deal with clean financials.

Buyer 1 - Sarah: The Clean Deal

Sarah’s target had the kind of financial profile that makes an underwriter’s job easy. The seller’s tax returns showed consistent performance across three years, with steady, incremental growth and stable margins:

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A couple of things to note here. Revenue grew at a steady 4–5% annually. No spikes, no dips. Gross margins improved slightly each year, indicating good operational control. And the SDE figure visible on the tax returns was already $730,000 before any add-backs. That’s important.

The add-back schedule was minimal:

After adjustments, the lender’s usable SDE came in at $740,400. Every add-back was small, documented, and independently verifiable. The bank gave full credit with zero pushback.

How the Lender Underwrote Sarah’s Deal

The underwriter looked at this deal and saw exactly what they want to see: consistent earnings, clean tax returns, minimal adjustments, and a stable revenue base. There was no need to normalize or stress-test the earnings because the three-year trend was already telling a consistent story.

Here’s how the DSCR calculation came together:

This is the kind of deal that moves quickly through underwriting. The credit analyst becomes your advocate to the credit committee because the story is simple and the numbers are clean. There’s no back-and-forth, no conditional approvals, no “we need to discuss this further” delays.

Sarah’s outcome:

• Full SBA loan approval at $2,520,000 (the full requested amount)
• QoE confirmed the seller’s financials with no material adjustments. Cost: $11,000
• Underwriting completed in 28 days. The bank had no reason to slow down
• Sarah closed 58 days from LOI execution
• Total out-of-pocket at close (equity + fees + QoE): approximately $376,000
• Post-close, she retained $124,000 in personal liquidity from $500,000 in savings

Buyer 2 - Kevin: The Add-Back-Heavy Deal at Peak Earnings

Illustrative • Hypothetical Scenario

Kevin’s target looked great on the broker’s CIM. The seller claimed $750,000 in adjusted SDE—the same headline number as Sarah’s deal. Same purchase price, same implied multiple.

But the composition of that $750,000 was completely different.

Here’s what the tax returns actually showed:

A few things jump off the page immediately.

Revenue spiked 26% in 2025. The seller had landed a large municipal janitorial contract in early 2025, a one-time buildout cleaning engagement tied to a public works renovation project. That contract represented roughly $400,000 in incremental revenue that was non-recurring.

The SDE trajectory tells the story: $410,000 → $485,000 → $650,000. The 2025 figure is 59% higher than 2023. An SBA underwriter is going to want to understand every dollar of that jump, and whether any of it will repeat.

And even at $650,000 in tax-return SDE, the seller was claiming $750,000. The gap? $100,000 in add-backs layered on top of an already-inflated peak year.

The Add-Back Breakdown: Claimed vs. Allowed

Here’s what the broker’s adjustment schedule looked like—and how the lender evaluated each line item:

Here’s the fundamental tension with add-backs: if a seller claimed the expense on their tax return, they told the IRS it was a legitimate business cost. Now they’re telling you it wasn’t. The bank is going to notice that inconsistency, and so should you.

How the Lender Underwrote Kevin’s Deal

After the add-back haircut, the underwriter’s adjusted TTM SDE came in at $769,000 ($650,000 + $119,000 in approved add-backs). On the surface, that’s actually above the seller’s claimed number.

But the bank didn’t stop there.

Because the 2025 earnings were clearly at a peak, driven by a non-recurring municipal contract—the underwriter refused to underwrite off the TTM alone. Instead, they built a weighted average across three years of adjusted SDE to normalize the earnings:

The underwriter also flagged the non-recurring municipal contract. Stripping out the estimated $400,000 in one-time revenue (and roughly $155,000 in associated margin after COGS), the bank’s sustainable SDE estimate came in at approximately $560,000.

The underwriter used the more conservative figure as the basis for the DSCR calculation:

The deal didn’t pencil. Not because Kevin was a bad buyer. Not because the business was bad. But because the normalized, defensible earnings couldn’t support the debt at the agreed-upon purchase price.

What the Bank Offered Instead

The lender didn’t outright decline Kevin. They came back with a counteroffer - a reduced loan sized to hit a 1.25x DSCR on the normalized cash flow:

Kevin had budgeted for a 10% equity injection. The bank’s counteroffer effectively required 19%. He didn’t have the additional $255,000.

Kevin’s Sunk Costs

Quality of Earnings Report (Phase I) - $12,000

Legal Fees (LOI review, due diligence) - $5,000

Travel (seller site visit) - $1,500

Total Sunk Costs: $18,500

Kevin’s outcome:

• The bank declined the full loan request of $2,520,000
• The counteroffer required $535,000+ in equity, nearly double his budget
• Kevin attempted to renegotiate the purchase price to $2.3M; the seller refused to move off $2.8M
• Kevin walked away 67 days after signing the LOI, having spent $18,500 in sunk costs

The QoE Phase I alone cost $12,000 (vs. Sarah’s $11,000 for a full engagement). And Kevin never even got to Phase II before the deal fell apart

What This Means for You

The number on the CIM—the seller’s adjusted EBITDA or SDE—is a marketing number. It’s designed to present the business in the best possible light. That’s not dishonest; it’s just the nature of the process.

But the bank’s job isn’t to market the business. The bank’s job is to underwrite repayment risk. And that means starting from the tax returns, requiring documentation for every add-back, stress-testing earnings against a multi-year baseline, and building in a margin of safety for the inherent risk of a change in ownership.

Three things to watch for before you sign an LOI:

• How much of the seller’s claimed SDE comes from add-backs? If add-backs represent more than 15–20% of total SDE, expect heavy lender scrutiny and higher QoE costs.
• Is the most recent year materially above the prior two or three? If so, understand what drove it and whether it’s repeatable. The bank will normalize- you should too.
• Can the deal service the debt at a normalized, multi-year average of earnings, and not just the peak? Run that math before you commit. If it doesn’t pencil at the average, you’re taking a bet the bank won’t take with you.

Thanks for reading!

Speaking Engagement

Michigan Ross ETA Conference — Ann Arbor, MI

I’ll be speaking at the Michigan Ross ETA Conference on Friday, March 27th in Ann Arbor, Michigan. If you’re in the ETA community and interested in attending, registration is open:

​Register here​

If you’re in the early stages of your search (particularly pre-LOI) and want to understand how lenders will evaluate your deal’s earnings profile, add-back schedule, and overall structure, I’d welcome the opportunity to connect.

You can book a short, informal call here:

For pre-LOI buyers ready to explore opportunities: Schedule a meet & greet call​

Already have a deal under LOI and need financing help: Schedule an LOI consultation​

Until next time,

Matthias Smith

President, Pioneer Capital Advisory

​www.pioneercapitaladvisory.com​
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Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

Thanks for reading! Feel free to reply directly to this email with any questions or thoughts.