Upcoming Event

Madison ETA Happy Hour

Thursday, August 20, 4:00 to 7:00 PM Central at Wisconsin Brewing Company, 1079 American Way, Verona, WI, just outside Madison. I'm co-hosting with my friend Chris Barrett, Founder and Owner of Midwest CPA.

If you're a current or prospective business buyer, your first three drinks are on Pioneer Capital Advisory and Midwest CPA. It's a casual evening for searchers, operators, investors, and anyone ETA-curious in the Madison area. Grab a drink, make some connections, and talk deals (bring your pro forma horror stories, they pair well with beer). The event is free. Just reserve your spot so we know you're coming.

​RSVP here​

Before This Week's Issue: Our Non-SBA Practice Is Open for Business

A quick word on something we've been building, because this week's topic sits right on the boundary between the SBA world and the one above it.

Most of you know Pioneer Capital Advisory as an SBA 7(a) shop. Over the past year we've built out a second vertical: conventional senior debt, mezzanine, and structured acquisition financing for deals that have outgrown the SBA program, or never fit it in the first place.

Rafael McFerran-Lopes, my Head of Business Development, is heading up BD for the vertical, and we have some genuinely exciting opportunities in motion right now.

Here's the sponsor we're built for:

What we do is run a real lender process, four to six senior providers in parallel, real term sheet comparisons on covenants and structure rather than just headline pricing, on a 60 to 90 day LOI-to-funding timeline. And the model is simple: our fee is sponsor paid at closing. If your deal doesn't close, you don't owe us anything, which keeps us lender-neutral and aligned with exactly one outcome, your wire moving.

If that profile sounds like you, or like the deal sitting on your desk right now, we'd love to have a call. Grab time with Rafael here, or if you're already under LOI, use this link instead.

Now, on to this week's issue, and fittingly, it's a topic that comes straight out of that world.

Pro Forma EBITDA Doesn't Pay Debt Service

There are two EBITDAs in every acquisition.

There's the one the business actually produced, sitting in the tax returns and the trailing twelve months, boring and verifiable.

And there's the one in the CIM, the “pro forma” or “adjusted run-rate” number, which is what the business would earn once the recent acquisitions are integrated, the synergies land, and the new contracts ramp.

Sellers price off the second number. Lenders lend off the first one.

The gap between those two numbers is where more deals quietly die than almost anywhere else I can point to, and this week I want to walk you through exactly how a lender reads that gap, why the loan gets sized the way it does, and the structures that bridge the difference when the pro forma story is actually real.

A Story From This Week: The 10x Roll-Up Priced on a Number That Doesn't Exist Yet

Details changed on this one, as always.

I had a call recently with a buyer working on a residential services roll-up. The platform had just completed its eleventh tuck-in acquisition, and the seller was ready to exit. Real recurring revenue, healthy gross margins, a genuinely attractive thesis.

Here's the math:

Verified trailing EBITDA: a little over $1M.

Pro forma EBITDA once everything just acquired was integrated and annualized: north of $4M.

And the seller's ask? A double-digit multiple of the pro forma number, an enterprise value several times what the historical earnings could ever support.

The buyer's question was the right one: where do I even anchor?

So we walked through it the way a credit officer would, and I'll walk you through it the same way, because whether your deal is a $2M landscaping company with an “adjusted” add-back schedule or a $40M platform with a run-rate story, the mechanics are identical.

Why Lenders Anchor on Historical Earnings

Start with what a lender actually is.

A lender does not participate in your upside. If the pro forma comes true, the bank earns the same interest it would have earned anyway. If the pro forma doesn't come true, the bank eats the downside with you.

So the lender's question is never “what could this business earn?” It's “what has this business demonstrated it can earn, because that's what will be making my loan payment in month three.”

Debt service is paid in cash, every month, starting the month after closing. It gets paid by the business that exists on closing day, not the one in the model. Pro forma EBITDA doesn't pay debt service. Trailing EBITDA does.

And the math is unforgiving.

At today's prime rate of 6.75%, a 10-year SBA acquisition loan priced at Prime + 2.75% is 9.50%, which pencils to roughly $152K of annual debt service for every $1M borrowed. Conventional senior paper amortizing over 5 to 7 years is heavier still per dollar. Every dollar of that payment has to come out of cash flow the business is already producing, which is exactly why the lender keeps dragging your eyes back to the trailing twelve months while the broker keeps pointing at the hockey stick.

That principle shows up as a number. On conventional and private credit acquisition deals, most senior lenders will extend somewhere between two and four turns of EBITDA in senior debt, and the EBITDA they multiply is the historical, verified figure, usually the more conservative of the trailing twelve months or the last full fiscal year, after the lender's own adjustments. On our roll-up above, that means the trailing number, call it $1M and change, supports maybe $3M to $4M of amortizing senior debt. Not the $18M+ the pro forma math would suggest.

On SBA deals the same idea arrives through the coverage test instead of a leverage multiple. The SBA floor is 1.15x debt service coverage on a historical or projected basis, and most banks underwrite to their own higher bar, typically 1.25x or better. Here's the part that matters: if the most recent full year and interims don't demonstrate sufficient coverage on their own, the rulebook requires the lender to obtain two years of detailed projections with supporting assumptions, and to justify why the projections deserve more weight than history. That is a much heavier lift, and most banks simply won't carry it. A deal that pencils on last year's tax return is in a different league than a deal that pencils on the seller's integration model.

Either way you slice it, the discipline is the same: the amortizing debt gets sized off what happened, not what's promised.

The Gap Has to Go Somewhere

Here's the useful reframe. The gap between the historical-supported debt and the pro forma-supported price doesn't make a deal impossible. It just tells you what the rest of the capital stack has to look like. Somebody has to carry the pro forma risk, and it should be the people positioned to benefit if the pro forma comes true. That's never the senior lender. It's some combination of the four layers below.

The seller, through a seller note. The workhorse. Debt that sits behind the bank, keeps the seller economically invested in the story they sold you, and doesn't amortize against the thin historical cash flow the way senior debt does. On larger conventional deals we'll often structure an interest-only runway or deferred amortization so the note waits for the pro forma to arrive before it starts consuming cash. One SBA-specific reminder, because it burns someone every month: a seller note only counts toward your equity injection if it's on full standby for the life of the SBA loan, and even then only up to half the required injection. Straight from the source:

A note with payments, or a 24-month standby, is still useful paper. It helps cash at close and it moves debt off the bank's amortizing stack. It just isn't equity, and finding that out in underwriting instead of at the LOI is an expensive way to learn the rule.

The seller, through an earnout, if you're outside the SBA program. On larger conventional and private credit deals, an earnout is the natural instrument for a pro forma gap: the seller gets paid the pro forma price if and when the pro forma shows up, usually measured against defined EBITDA or revenue thresholds over one to three years. Know two things about earnouts before you lean on one. First, your senior lender will underwrite the earnout as a real obligation and will want it deeply subordinated, with payment blockers if covenants are tight. Second, know the program boundary cold, because on an SBA deal this tool does not exist:

So on an SBA-financed deal, the price cannot ratchet up on future performance, full stop. The pro forma gap has to be bridged with standby seller paper, rollover, or equity instead. If the deal genuinely needs an earnout to make sense, that's often the tell that it belongs in the conventional bucket, not the 7(a) program.

The seller, through rollover equity. If the seller believes the run-rate story, rolling 10% to 25% of the price into the new entity is the cleanest way to prove it. Rollover reduces the cash you need at closing, keeps the seller's incentives pointed at a smooth handoff, and gives them a second bite at the apple on the platform exit. Sellers who won't roll and won't carry contingent paper on a pro forma-priced deal are telling you something about their own confidence in the number.

Capital partners who ride the upside. This is why the lender type matters as much as the lender. A bank anchors conservatively because its best case is par plus interest. An SBIC fund, a mezz fund with warrants, or a private credit shop that co-invests is structurally different: they participate in the upside if the pro forma lands, so they can afford to give the growth story real credit, and their leverage tolerance reflects it. On pro forma-heavy platforms, the right capital partner is usually one with equity-flavored economics, not the cheapest senior sheet.

When Pro Forma Actually Gets Credit

Not all pro forma is created equal, and lenders know the difference. The practical framework is a three-bucket hierarchy.

Full credit: adjustments that are already contractual. Signed multi-year agreements that transfer with the business. Completed acquisitions with their own trailing financials, which is why a roll-up that closed its tuck-ins six-plus months ago has a fundamentally easier financing conversation than one that closed them last quarter. A price increase already in effect and visible in the interim statements. That's visibility, and visibility is financeable.

A haircut: adjustments that are partially proven. Recent tuck-ins with a few months of post-close operating history. Cost reductions already actioned, the headcount is actually gone, but not yet annualized in the financials. A thoughtful lender will give partial credit here, and the size of the haircut is exactly where a well-packaged file earns its keep.

Zero credit: adjustments that require execution. Synergies that depend on integration nobody's done yet. Cross-selling that hasn't happened. “The new GM will fix the margins.” The more verbs between today and the number, the less a credit committee will pay for it.

So if your deal has a pro forma story, your job is to convert as much of it as possible from narrative into paper before the lender asks. Contracts, agreement schedules, monthly recurring revenue detail, completed-acquisition financials, a QoE that separates the proven adjustments from the aspirational ones. The buyer in my story is doing exactly this right now: getting the contract schedule and MRR detail from the seller so the recurring revenue claim becomes a document instead of a sentence.

This Isn't Just a Big-Deal Problem

Before you file this issue under “platform deals,” know that the same mechanics run through every main-street acquisition with an add-back schedule. A $2M HVAC business where the broker's SDE calculation adds back the seller's spouse's salary, the one-time lawsuit, the “discretionary” travel, and a marketing spend the business actually needs? That's a pro forma number wearing a different name. The lender will rebuild it line by line, disallow the add-backs that aren't truly non-recurring, subtract a market salary for you, and size the loan off what's left. If your offer only pencils on the broker's version of earnings, you don't have a financing plan. You have a disagreement waiting for an underwriter to referee it.

Run the lender's math yourself before you sign anything: take the most conservative defensible EBITDA, subtract your market salary, apply a 1.25x coverage test against the proposed debt service, and see what survives. Ten minutes of that arithmetic before the LOI beats ten weeks of restructuring after it.

One Question to Ask

Here's the practical move, and it's the same advice I gave on the call.

Stop negotiating the multiple and ask the seller: what do you actually need in cash at closing?

Every pro forma-priced deal is really two numbers wearing one price tag: the headline the seller wants to say out loud, and the wire they need to hit on closing day. Those are usually very different figures. Once you know the real cash-at-close number, you can anchor the structure around it: senior debt sized to the historical earnings, the certain piece of seller paper behind it, and the pro forma premium pushed into the instruments that only pay if the pro forma is real, rollover, contingent paper, or (off-SBA) an earnout.

And when you present it, frame it the way a confident seller can hear it: “You've told me the run-rate is real. This structure pays you your full number when it shows up. If what you've told me is true, this costs you nothing.” The seller keeps their headline. You keep a debt stack the actual business can service. And the lender sees a file where every layer of the capital structure is carried by the party best positioned to underwrite it. That's not a compromise. That's just the deal, priced honestly.

The 60-Second Version

• Every deal has two EBITDAs: the one in the tax returns and the one in the CIM. Sellers price off pro forma; lenders lend off historical. Debt service is paid by the business that exists at closing.
• Senior leverage gets sized off verified trailing earnings, roughly two to four turns on conventional deals. On SBA deals, coverage below the bar on historicals triggers a two-year projections requirement most banks won't carry.
• The gap between the historical-supported debt and the pro forma price has to be carried by someone with upside: seller note, rollover equity, earnout (conventional deals only), or an SBIC-style partner with equity economics.
• On SBA deals, earnouts are prohibited under SOP 50 10 8, and a seller note only counts toward the equity injection if it's on full standby for the life of the loan, capped at half the injection.
• Pro forma earns credit in proportion to how contractual it is: full credit for signed paper, a haircut for partially proven adjustments, zero for synergies that still need verbs. Convert the story into documents before the lender asks.
• The same math governs main-street add-back schedules. Rebuild the lender's version of EBITDA and run the 1.25x test before you go under LOI.

Ask the seller what they need in cash at close, then build the structure backward from that number. The multiple is a headline.
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Thanks for reading!

If you're working on an acquisition, or are in the pre-LOI phases, you can book a short, informal call here to meet our team and learn how we can help you.

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​

Independent sponsors on a non-SBA deal (pre-LOI): Schedule a financing call with Rafael​

Independent sponsors with a deal under LOI: Schedule an under-LOI call with Rafael​

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.