From Dream to Deal: What Bankers Really Want to Hear redacted“This business will revolutionize the industry! We’re projecting 300% growth in the first year!” I cringed as I heard this from a former student’s friend practicing their pitch to an SBA Lender. Fresh from the venture capital world, they were unknowingly sabotaging their chances of securing acquisition financing. Every ambitious projection, every mention of disruption, was pushing them further from their goal. Why? Because they were selling a dream to people paid to avoid them. If you’re transitioning from the world of venture-backed startups to business acquisition, or if prior to this point in your process you’ve strictly spoken to equity investors, this shift in perspective is critical. Let me describe what bankers actually care about and how it differs from what investors prioritize. (Special thanks to Adam Markley of PROX Capital and the Denver ETA Meetup, for his help fact-checking some of the more nuanced aspects of SBA financing.) Downside Protection vs. Upside Participation Picture this: An investor and a banker walk into a room. You show them a graph with two scenarios: • Best case: The business will 10x in value • Worst case: The business fails The investor’s math: They lose $1M in the worst case, but make $10M in the best case. Depending on the probability of the 10x, probably worth the risk. The banker’s math: They lose $1M in the worst case, but in the best case? They only get their 7% interest plus fees. Same risk, fraction of the reward. This brutal math shapes everything about how bankers evaluate your deal. While investors hunt unicorns, bankers hunt for validation that you won’t become their next write-off. When an investor looks at projections showing 10x growth, they get excited. When a banker sees that same chart, they’re thinking, “Great, another entrepreneur who doesn’t understand our business.” Let’s get specific about what bankers scrutinize. These are the metrics and issues that sink deals - often before they even reach the credit committee: 1. Debt Service Coverage Ratio (DSCR): Banks typically want to see at least 1.5x coverage (often higher), meaning the business generates 50% more cash than needed for debt payments. But here’s what they don’t tell you: they’ll calculate this after: • Backing out any one-time add-backs • Adjusting owner salary to market rate • Adding a capital expenditure reserve • Anticipated income tax liability 2. Customer Concentration: If any single customer represents more than 15-20% of revenue, expect intense scrutiny. I’ve seen deals fall apart over this alone, even with perfect financials and debt service coverage. 3. Working Capital Requirements: Banks get nervous if the business needs more thanredacteddays to convert inventory or Accounts Receivable to cash. Why? Because that’s their collateral, especially in a cash flow-based loan. Expect intense scrutiny of this cash conversion cycle, as well as the starting working capital balance. Borrowing to fund the initial working capital can push you out of an acceptable DSCR range. 4. Recent Changes: Any significant shifts in the last 24 months are red flags: • Major customer losses/gains • Gross margin swings • Unusual profit or loss spikes 5. Post-Acquisition Liquidity: Due to recent SBA loans vintages defaulting at higher than historical rates, lenders are may now expect greater post-acquisition liquidity from the entrepreneur. In other words, the bank wants to verify that if your business gets into trouble, you have the capacity to invest more equity to stabilize the business. From an underwriting perspective this may mean lowering the entrepreneur’s upfront equity contribution, often by bringing on investors, and/or buying something smaller. It may also mean evaluating other income sources (spouse, investments, etc.). Some lenders may require acquirers to maintain available liquidity equal to 10% of the transaction value, AFTER their equity injection. Remember: Banks aren’t just looking at whether you can pay them back. They’re also looking for reasons you might not. Your job isn’t to sell growth; it’s to systematically eliminate their concerns. While the business’s numbers are critical, there’s another risk banks obsess over: YOU. Specifically, they worry about: 1. Industry Experience Gap: Banks get nervous when you can’t demonstrate direct industry experience. Here’s how to address this: • Highlight transferable skills from adjacent industries • Show you’ve already built relationships with key suppliers • Name specific industry mentors who’ve agreed to advise you 2. Succession Risk: Banks fear the business will stumble during ownership transition. Pre-empt this by: • Detailing your retention strategy for key employees • Showing a concrete transition plan with the current owner • Explaining your first 100 days of operation plan • Discuss any deal terms that keep the seller tied to the business’ success (seller notes, consulting agreements, etc.) 3. Financial Commitment: Banks want to see you have skin in the game beyond the minimum required equity. Be prepared to discuss: • Your liquid net worth outside this investment • Other income sources during the transition • Personal guarantees you’re willing to provide Remember: Banks aren’t looking for visionaries. They’re looking for reliable operators who understand the business they’re buying. The Bank’s Due Diligence Playbook Start Early: Pre-LOI Consultation Most acquisition-focused bankers prefer to see deals before you have a signed LOI. Why? Because they can help shape the deal into something they can actually finance. This is especially critical for SBA loans, where recent policy changes have tightened requirements. SBA preferred lenders can help you with: • Initial financial models • Deal structure thoughts • Structure compliant equity injection (minimum 10% required) - Navigate seller note restrictions (must be on full standby) - Identify potential eligibility issues early • Areas needing deeper diligence With the 2025 SBA policy changes reinstating stricter underwriting criteria, getting early lender input can save months of restructuring later. Here’s what actually happens after you submit a loan application, and how to prepare for each stage: 1. Initial Screening (3-4 weeks for SBA loans) Quick note: it’s really best to do this screening BEFORE an LOI is finalized, to ensure you understand what lenders will or will not support. • They’ll run your personal credit and background check • Review tax returns and interim financials • Calculate preliminary DSCR and collateral coverage Common killer: Missing or inconsistent financial statements • Verify SBA eligibility requirements - Confirm proposed equity injection sources - Review any affiliate businesses • You can preempt some of this by seeking pre-qualification with some lenders • Common killer: Insufficient equity injection or ineligible sources Deep Dive (6-8 weeks for SBA loans) • Quality of Earnings report by your approved CPA • Site visit and management interviews • Detailed collateral appraisal • Additional SBA requirements: - Personal resource tests - Affiliate analysis - Management experience documentation - Franchise registry verification (if applicable) • Common killers: Discoveries that differ from your initial presentation, or Post-LOI deal structure changes that conflict with SBA requirements Final Approval (3-4 weeks for SBA loans) • Credit committee review • Term sheet and commitment letter • Conditions precedent list • Common killers: o Non-compliant seller financing terms or incomplete SBA forms o Late-stage business performance problems, sometimes due to seller’s distraction with the transaction process Pro tip: With SBA loans, you’re managing two approval processes: the bank’s credit risk assessment AND SBA eligibility requirements. Miss either, and your deal won’t close. Your job is to anticipate and address their concerns before they become issues. Resources for the First-Time Acquirer If you’re just beginning this journey, here are some invaluable resources: • HBR Guide to Buying a Small Business – An excellent “zero-to-one” resource covering the full acquisition process • A.J. Wasserstein’s publications at Yale School of Management – 95% freely available online • Live Oak Bank resources – As the leading SBA lender for self-funded search, their webinars and content explain bank underwriting processes in detail Live Oak even offers open office hours where you can have questions answered directly by underwriting professionals. However, they prefer you consume their published content first and save direct outreach for when you have a deal under LOI. Essential Resources for SBA Bank Financing • U.S. Small Business Administration 7(a) Loans (SBA.gov) • Think Big, Buy Small Podcast: The Fantastic Economics of SBA Loans • Financing Your Business Acquisition with SBA 7(a) Loans (Live Oak Bank) • Fund Your Next Business Acquisition with an SBA Loan (Byline Bank) Pro tip: General acquisition books like the HBR Guide are very useful, but they don’t cover the detailed banking requirements that actually kill deals. Make sure to dig into the bank-specific resources before pursuing these loans. The Fundamental Shift The transition from thinking like a venture capitalist to thinking like a banker requires a paradigm shift. It’s moving from “What could this become?” to “What has this proven to be?” From emphasizing potential to emphasizing stability. Make this shift successfully, and you’ll find bankers much more receptive to your acquisition plans, and much more likely to provide the financing that makes your entrepreneurial dreams possible. A Final Note Remember my former student’s friend? After our conversation, they completely rewrote the bank pitch. Instead of leading with “300% growth potential,” they opened with “15 years of stable cash flows, no customer concentration above 12%, and consistent 1.75x debt service coverage.” The bank was ready to support the deal. Ironically, they ended up walking away when the seller tried to change the acquisition terms after the LOI, so it was back to the search for another acquisition. The shift from selling dreams to demonstrating stability isn’t just a change in presentation - it’s a fundamental realignment of how you think about business value. Master this shift, and you’ll find bankers become allies in your acquisition journey, helping you separate good deals from mirages.