Why Acquisition Deals Die in Underwriting

Four paragraphs. That is all it took.

Earlier this summer a client of ours had a signed term sheet from an SBA lender. Diligence was substantially complete. The seller was cooperative. The buyer had a relevant operating background and had done the work. Everyone on that deal, myself included, was planning around a closing date.

Then the email landed. Information related to the buyer's personal credit history had come to light after the term sheet was issued, it had become a significant factor in the credit review, and they were unable to move forward. A formal adverse action notice would follow.

Months of work. A business the buyer genuinely wanted to run. Gone.

Here is the part that stings. Nothing about the target had changed and nothing about the price had changed. What killed that deal was a fact that existed on day one and did not get put on the table until the bank found it on day sixty.

So let me be fully open and honest about something I do not think gets said enough in the ETA community. A term sheet is not an approval. It is an invitation to be underwritten. That gap is where most deals go to die, and almost all of it is predictable if you know where to look.

Pioneer Capital Advisory LLC is a commercial loan brokerage focused on acquisition financing for buyers of small and mid-sized businesses. Our clients are searchers, self-funded buyers, independent sponsors, and operators buying their first or second company. To date we have closed over $330 million of SBA 7(a) loans across more than 150 SBA financed acquisitions.

My job is not to cheerlead a deal. It is to read a transaction the way a credit officer will read it, tell the buyer honestly where it is going to catch, and place it with the lender whose credit box actually rewards that deal's story.

We run two verticals.

On the SBA 7(a) side, which is the majority of our volume, we work on acquisitions, on expansion and add-on acquisitions where an existing owner is buying a second location or a competitor, and on debt refinance transactions. The 7(a) program caps at $5.0MM to any one borrower, so above that number we are building a debt stack rather than writing one loan.

On the independent sponsor and non-SBA side, we work with buyers acquiring companies doing over $2MM in earnings, where the deal is too big for a single 7(a) loan and needs conventional senior debt, unitranche, mezzanine or sub debt, an asset-based facility, SBIC capital, or some combination. Same discipline, higher bar. Non-SBA senior lenders generally want coverage closer to 1.50x versus the roughly 1.25x SBA lenders look for, and they care a great deal about how much of the sponsor's own cash is going in, not just how much the sponsor can raise.

Here is one from our own files, anonymized.

The client was an operator acquiring a commercial refrigeration and HVAC services company. We were engaged at the start of January. The commitment letter came through on February 23. The deal closed in late March. Call it about twelve weeks from kickoff to funded on an SBA 7(a) change of ownership.

Nothing exotic happened here. No favor was called in and no corner was cut. This buyer simply front-loaded every item that normally gets discovered late. Here is what that looked like.

The data room was full before any lender asked. Three years of target tax returns, the P&L, the balance sheet, and the A/R and A/P aging were uploaded in the first week. When a lender had a question, the answer was already in the folder. Compare that to the typical deal, where every request kicks off a three day scavenger hunt with a seller who is busy running his business.

They surfaced their own bad news first. Two items here would have been real problems if a lender had found them cold. Fourth quarter revenue at the target had dipped, and there was a prior bankruptcy in the file that needed explaining. The buyer put both on the table early with a written explanation attached. On the revenue dip they did not wait for a credit officer to annualize a soft quarter and get nervous. They pulled the quarter over quarter sales and gross profit history themselves, showed the softness was seasonal and consistent with prior years, and got on the phone with the sellers to confirm what was behind it.

That is what I mean by being your own first credit officer. The dip was still a dip. But it arrived as an explained fact instead of a discovery, and those two things get underwritten very differently.

They solved the licensing question before it was asked. On a trades business the qualifier license is a live credit issue, because most banks do not want the seller to be the only license holder after closing. This buyer had the license transfer documentation drafted and in the folder within the first few weeks. That one item delays or kills more trades deals than anything else I see.

We ran multiple lenders in parallel. The buyer met several banks inside the same window rather than one at a time. That created real competitive tension on terms, and it meant that if one credit committee went cold we had a live alternative instead of a restart.

Counsel came in early and knew SBA. In the final week the closing documents and the Form 155 standby agreements were confirmed clean on the first pass, which almost never happens when counsel is learning the forms on your deal.

And the buyer wrote a weekly update. Every Friday, a short note to the whole working group on what moved and what was stuck. That sounds like a small thing. It is not. It kept the buyer, our analyst, the bank, and both sets of counsel pointed in the same direction for twelve straight weeks.

The through line is simple. This deal did not close fast because the credit was easy. It closed fast because almost nothing surfaced late.

This is the number one killer, and in most cases it is not fraud or anything close to it. The marketed number was built to sell a business. It was not built to be underwritten.

From a credit standpoint, add-backs are guilty until proven innocent. Personal and discretionary items lumped into broad buckets are the first thing credit cuts. Spikes get normalized out too, and the reason is simple. No credit officer sizes leverage off one strong quarter, a one-time project wave, or a weather event. Banks underwrite filed tax returns. Interim financials are corroboration, not the basis.

Run your own recast before the lender runs theirs, and appreciate the quiet math. If some of those add-backs do not hold, the multiple you are actually paying goes up.

Debt service coverage is the gate. SBA lenders generally look for 1.25x minimum, and that test has to clear after a market owner salary is sitting in the expenses.

This is the one almost every first-time buyer misses. Your salary is an operating cost, not an add-back. Even if your plan is to take distributions only, underwriting committees want a market salary on the cash flow waterfall.

Two more traps. A seller note on a short standby still counts in the coverage calculation, because lenders test the debt load after the standby burns off. And figure out whether you have a pricing problem or a coverage problem before you renegotiate. In my experience a higher price often is not what breaks the deal. What breaks it is the seller note getting rewritten from standby to amortizing.

Then stress test it at flat, down 10%, down 20%, and down 30%. A deal you should feel good about absorbs a 10% to 15% decline before coverage is in trouble.

Under SOP 50 10 8 a full change of ownership requires a minimum 10% equity injection, and the acceptable sources are specific. A seller note counts toward that injection only if it is on full standby for the life of the SBA loan, and generally it cannot exceed half of the required injection.

I hear "just put the seller note on standby for 24 months and it counts as equity" more often than I would like. Being fully open and honest, that is loose shorthand and it is wrong. A 24 month standby is a cash-at-close tool, not an equity substitute. If your injection math depends on that misunderstanding, the deal fails in underwriting instead of at LOI, which is the expensive way to find out.

There is one page in your target's data room that a credit officer will find in about ninety seconds. It is the customer revenue schedule.

Lenders start asking real questions once a single customer crosses roughly 10% of revenue. At 25% and up, concentration stops being a footnote and becomes the credit decision. By 50%, the bank is underwriting that customer nearly as much as the business you are buying.

Concentration is a risk you manage and structure around, not an automatic decline. That said, run the deal yourself without the concentrated revenue, because the lender absolutely will.

And here is what matters as much as the percentage. A customer of ten years on a documented order history that transfers to the new owner is a completely different animal from one of eighteen months on a handshake with the seller who is walking out the door. Same percentage. Entirely different credit.

The mitigants that tend to work are a tranched seller note with forgiveness tied to customer retention at 12, 24, and 36 months, pre-close confirmation that contracts are assignable, and the seller retained through transition.

This is the one from my opening story, and it is entirely avoidable. Your file is part of the credit, not a formality at the end of the process.

A lender only gets credit for the balance sheet of someone who actually signs a guaranty, so a wealthy non-guarantor does not help you. Any owner at 20% or more generally provides a full personal guaranty. Under SOP 50 10 8 the "credit available elsewhere" test brings the personal resources of owners back into consideration, and prior federal loan losses or delinquent federal debt trigger a CAIVRS check that can no longer be waived.

If there is something in your credit history, your liquidity picture, or your background that a bank is going to find, put it on the table in week one with your own explanation attached. Surfaced early, most of it is manageable. Discovered in week nine, it reads as a character issue on top of a credit issue.

Some deals were never eligible in the first place. And the rules move by procedural notice, so precedent from a deal you watched close eighteen months ago is not a safe guide.

A few current ones. Effective March 1, 2026, per Policy Notice 5000-876441, 100% of all direct and indirect owners must be U.S. Citizens or U.S. Nationals residing in the United States, and lawful permanent residents are no longer eligible to hold any ownership interest. Search fund acquisitions and multi-step partial changes of ownership are both called out as ineligible under SOP 50 10 8. On franchise deals, check the brand against the SBA Franchise Directory. And if you own other portfolio companies, affiliation rules can aggregate their revenue and employees with your target and push you over the size standard.

None of that is exotic, and all of it is checkable before you spend real money.

Lender selection matters more than most buyers think. The same file is a decline at a bank that underwrites strictly to the trailing average and a term sheet at a bank whose credit box rewards a documented structural improvement or a well-mitigated concentration.

I have watched deals turned down at one institution get approved and closed elsewhere with zero change to the underlying business. That is not luck. That is fit. Shopping broadly and hoping is not a strategy, and it is how you end up holding a term sheet that was never getting through committee.

Pay attention to conversion, too. A term sheet from a lender who properly preflights their credit is worth far more than one from a lender who does not. Same piece of paper. Nowhere near the same probability.

If you have a target closing date, count back roughly 10 to 11 weeks to know when financing needs to start. The case study above closed in about twelve, and that was with a buyer who had everything ready. Deals that die of timeline rarely die cleanly. They die as a string of extensions, a seller losing patience, and a buyer taking worse structure under time pressure.

Almost every deal I have watched fall apart in underwriting failed for a reason that was sitting in plain sight back at LOI. Soft earnings. Thin coverage once a real owner salary went in. An injection built on a structure that does not count. Fragile concentration. Or something in the buyer's own file that had not been disclosed.

Underwriting does not create these problems. It finds them.

So be your own first credit officer. Recast the numbers conservatively. Put a market salary in. Strip out the largest customer and see what is left. Get your documents into the folder before anyone asks. And disclose your own bad news early, in writing, with the explanation attached.

The buyer in that case study did not close in twelve weeks because the deal was easy. They closed in twelve weeks because there was nothing left to find. That is the whole game.

I hope this is helpful. If you are working through a deal and want a second set of eyes on how a credit officer will read it, I am always happy to be a resource. Feel free to reach out anytime at [email protected].

Matthias Smith is President / Owner of Pioneer Capital Advisory LLC, a commercial loan brokerage specializing in SBA 7(a) and non-SBA acquisition financing for searchers, self-funded buyers, independent sponsors, and operators.

Disclaimer: This article is for informational purposes only and is not legal, tax, or investment advice. Deal details have been anonymized. SBA program rules referenced reflect SOP 50 10 8, effective June 1, 2025, as amended by procedural notices through early 2026, and are subject to change at any time. Lender-specific credit overlays vary by institution and are separate from SBA program eligibility. I would recommend confirming any material decision with your counsel and your own advisors. Business acquisitions involve significant risks, and outcomes can vary widely based on individual circumstances. Always consult with qualified professionals including attorneys, CPAs, and financial advisors before making acquisition decisions. The EBIT Community does not guarantee the accuracy of information provided or the success of any acquisition strategy. Past performance and examples do not guarantee future results.