Buying a Business With a Loan: Why Coverage Is Tested on Historical Earnings, Not the Buyer's Plan

A person who borrows to buy a running business arrives at the lender with two sets of numbers. The first belongs to the seller: tax returns and financial statements for years that are over. The second belongs to the buyer: a plan for what the business will earn under new ownership, usually with growth, savings and fresh ideas folded in. The two rarely agree, and the lender has to decide which of them sizes the loan. This series sizes it on the first, but never on the first as filed. This article is about the step in between: normalizing a seller's historical earnings for an acquisition loan, one documented adjustment at a time, so that the record shows what the business would have earned carrying the buyer's costs. Around that step it covers why history governs a purchase, which papers each adjustment rests on, how coverage on the normalized history compares with coverage on the buyer's plan, what goodwill does to the analysis, and what a feasibility study adds when the real question is whether the past will repeat under someone else.

For SBA 7(a) purchases, the site's SBA program page reports the floor the agency's current lender guidance sets: 1.25x on historical earnings for ESOP purchases, owner buyouts and initial acquisitions, equal to the lender assumption this series states, and 1.15x for a business expansion ^[1]. The site's page groups changes of ownership under four headings ^[2]. For three of them, all but the business expansion, the site's page says a projection cannot satisfy the floor, except where the purchase is qualifying special-purpose property ^[3].

Rules here come from 13 CFR part 120, the Internal Revenue Code, federal banking guidance and SBA's own pages. The series holds no official copy of the agency's current lender procedures, so wherever this article reports them it reports what the site's SBA page says, names that page as the source, and goes no further.

Three archived posts on this site sit close to the subject. SOP 50 10 8.1 for Lenders: The Four Acquisition Categories, the Historical Coverage Test, and What Changes on 1 October covers the four categories and, as part of its account of the change that took effect on 1 October, the historical coverage test itself, and The Small Business Acquisition Market Before 1 October: What the Numbers Look Like Going In describes the market for business purchases as it stood before the change; both are the site's posts, and for the categories themselves this article cites the site's SBA page ^[2]. The structural repairs available once coverage falls short are the subject of A Failed DSCR Is Rarely a Failed Deal. It Is Usually a Failed Structure. Part 120 is read section by section in SBA 7(a) Method: What 13 CFR 120 Tests and How a Feasibility Study Answers Each Test, and the arithmetic of the ratio in Debt Service Coverage in a Feasibility Study: How the Ratio Is Built, and Which Floor Binds. This article keeps to the step all of them take for granted: how a seller's earnings are normalized before any test is run on them.

Conventions. This article follows the conventions of the Loan Analytics worked examples. Coverage is tested against the program floor the site's program page states, where the program has one, and against a stated 1.25x lender assumption, and the higher of the two binds. Equity is measured at the loan the cash flow supports, with fees recomputed on that loan. An acquisition is tested on the seller's historical earnings, not on projections.

What 13 CFR 120 Says About Buying a Business, and What It Leaves Open

SBA's 7(a) page lists changes of ownership, complete or partial, among the uses a 7(a) loan may finance ^[4]. The regulation deals with the subject in a single sentence. Section 120.202 allows 7(a) money to buy an owner's interest in a business, in whole or in part, or the business itself, again in whole or in part ^[5]. That is the whole section. It names no coverage ratio, no equity share, no cap on how much of a price may go to goodwill and no rule about which year's earnings count.

The restrictions section adds a condition that touches almost every purchase. Section 120.130 lists purposes for which SBA will not authorize proceeds and a borrower may not use them, including the replacement of money already spent on such a purpose ^[6]. First on that list are payments, distributions or loans to Associates of the applicant, with two exceptions: ordinary compensation for services rendered, and payments that facilitate a change of ownership in accordance with 120.202 ^[7]. Where a seller or a departing partner counts as an Associate of the applicant, a payment to that person passes only as one of those two things. A study should lay out the uses of proceeds so that every dollar headed to a person connected with the business is identified either as price paid under the purchase agreement or as pay for work done.

The text of Part 120, in the 2026 edition this series holds, does not use the word goodwill. Its nearest term is intangible assets, and the term appears where the regulation lets an Eligible Passive Company borrow alongside the business that operates from its property: when a 7(a) loan includes working capital or the purchase of other assets, intangible assets among them, for the operating company's use, the operating company must be a co-borrower ^[8]. The regulation contemplates buying intangibles without saying how a lender should judge them.

On credit the text is general: the applicant, counting any operating company, has to be creditworthy, and "Loans must be so sound as to reasonably assure repayment" ^[9]. Beyond that, it names the evidence the approving party may weigh, each where it applies: how the applicant, its Associates and anyone guaranteeing the loan have handled credit; what the business earns, or the cash it throws off; and whatever equity or collateral stands behind the request ^[10]. When a lender asks whether credit is available elsewhere, one listed factor is "the loan term necessary to reasonably assure repayment of the loan from actual or projected business cash flow" ^[11]. Both kinds of cash flow appear in the regulation's own words.

The clearest pairing sits in the subpart on employee stock ownership plans. Under 120.350 SBA may guarantee a loan that lets a qualified employee trust buy ownership or voting control of the employer ^[12], and when SBA judges repayment on such a loan it leaves the employee-owners' personal assets aside and "shall consider the earnings history and projected future earnings of the employer small business" ^[13]. History comes first in that sentence, but the projection is not thrown out.

So the rule that only history can meet the floor does not come from Part 120. The site's SBA page attributes it to the agency's current lender guidance, applies it to three of the four categories and keeps an exception for qualifying special-purpose property ^[3]. The site's page confines that exception to projects in which real estate makes up 85 percent or more of the total cost ^[14], so a business bought without its building can never use it. From here on, the historical test means the test the site's page states, applied as the series' worked examples apply it.

Why History Governs an Acquisition

The case for history is not that the past predicts the future well. It is that the past is the only part of the record produced by someone other than the buyer. A seller's returns report what the business earned with its actual customers, prices, staff and rivals. The application for most SBA business loans already calls for historical financial statements, or tax returns where appropriate, covering three years, with IRS tax verification ^[15]. SBA's own guide to buying a business draws the same line from the buyer's side: an existing business has the advantage of an established financial history, while lending to a new one typically turns on its owner's personal credit ^[16].

The second argument is about circularity. Among the ways SBA's guide offers for setting a fair price are a capitalized earning approach, built on the return the investor expects ^[17], and a cash flow method used to gauge how much of a loan the business's cash flow can support ^[18]. A buyer who pays a price built on expected earnings, and then asks the lender to size the debt on those same expected earnings, is counting one hope twice. The premium paid for growth the business has not yet shown would be financed with debt that only that growth can repay. Sizing on history breaks the loop. The price may assume growth; the loan does not.

The third concerns what a plan is. Federal banking regulators, writing about leveraged transactions, describe a base case projection as the borrower's or sponsor's expected estimate of performance under the assumptions judged most likely ^[19]. The same guidance tells lenders to ask whether cash flow analyses lean on "overly optimistic or unsubstantiated projections of sales, margins, and merger and acquisition synergies" ^[20]. It was written for leveraged lending, and the definitions of leveraged lending it describes commonly combine several features, one being proceeds used for buyouts, acquisitions or capital distributions ^[21]. The agencies also said they did not intend it to cover small portfolio commercial and industrial loans ^[22], so it is cited here for how regulators frame the risk in a purchase forecast, not as a rule for a small business sale.

The fourth is timing. SBA's 7(a) page says the usual 7(a) term loan is paid down every month, principal and interest together, out of what the business generates in cash ^[23]. On a monthly schedule the early installments fall due long before any part of a buyer's plan can have been proven. What the lender relies on in those first months is the seller's business with a new name on the ownership papers.

The site's SBA page compresses all of this into one line: "Acquisitions of established businesses are now underwritten on their own history" ^[24]. History has a limit, though, and the method has to respect it. The returns describe the seller's business under the seller's cost structure. The buyer will pay a manager the seller never hired, rent the seller never charged itself and interest on a loan the seller never took. Testing the seller's raw figures would answer the wrong question, which is why the historical test always begins with normalization.

The Evidence File: What the Seller Produces and What Each Document Can Prove

Normalization is only as sound as the documents beneath it. The application file for most SBA business loans has to describe, among its other contents, the business's past and what kind of business it is ^[25], along with three years of historical statements, or tax returns where those fit better, the IRS's verification of the returns and, when one applies, a business plan ^[15]. SBA's buying guide lists the papers an attorney and an accountant can help a buyer prepare and weigh: the letter of intent, the confidentiality agreement, contracts and leases, financial statements, tax returns, the sales agreement and the purchase price adjustment ^[26]. It tells buyers not to hold back from asking about contracts, leases, existing cash flow and inventory ^[27], and it calls for a thorough, objective investigation once a target is chosen ^[28].

Each document proves something different, and a study should say which one supports which line. The tax return is the record the seller filed with the government, and the regulation lists IRS tax verification among the application's contents ^[15], which lets a lender check the copy in the file against the return actually filed. Internal statements carry the detail a return compresses: revenue by line of business, payroll by position, rent by location. The general ledger and the bank statements are what an add-back rests on, because an add-back is a claim that a specific payment was not a cost the buyer will carry. The lease, the supplier contracts and the customer agreements show which costs and revenues survive the sale. A study should reconcile the return to the statements and the statements to the deposits, and where a gap will not close, it should say so rather than pick the friendlier figure.

Two further documents sit beside the study but are not part of it. The site's SBA page states that the agency's current guidance calls for a Quality of Earnings report once the price paid for the business is $3 million or higher, and for an independent valuation from a credentialed source above $350,000 ^[29], and the same page states that seller earnouts are prohibited ^[30]. A feasibility study is neither of those two documents. It does not audit the books and it does not value the business, its goodwill or any property; A Feasibility Study Is Not an Appraisal: What Each Document Answers, and What Each Cannot sets out the difference. With the seller's documents, the study builds the normalized statement a lender can test, then asks whether the market that produced those earnings is still there.

Normalizing a Seller's Historical Earnings, One Documented Line at a Time

For an acquisition loan, normalizing the seller's historical earnings means restating each year as if the buyer's business had earned it: the same customers and prices, but the buyer's costs and none of the seller's private arrangements. Each adjustment moves the reported figure toward that restated one, and each has to be shown, not asserted. The site's methodology page sets the bar every adjustment must clear, which is that each material assumption traces to a source a reviewer can verify ^[31]. For an add-back, that source is a document in the file, not the seller's recollection.

Interest is the first add-back. A seller's return deducts interest on the seller's debt. The method assumes that the sale retires that debt, which the purchase agreement and the payoff letters should confirm, and that the buyer's loan takes its place, and the buyer's debt service is the denominator of the coverage ratio, so adding back the seller's interest keeps financing from being counted twice. Debt the buyer assumes is the exception: its payments belong in debt service.

Depreciation and amortization come next. The tax code allows depreciation as a reasonable allowance for the exhaustion and wear and tear of business property, obsolescence included ^[32]. The deduction is not a cash payment in the year it is taken, so it is added back. But equipment does wear out, and the buyer will have to replace it. A study that adds back depreciation should deduct a replacement reserve built from the asset list, the ages of the major items and what they cost to replace. Adding back depreciation without a reserve treats worn equipment as free.

Owner compensation needs the most care. The code allows a deduction for a reasonable allowance for salaries or other compensation for personal services actually rendered ^[33], yet what a seller pays itself is a choice that tax planning can shape as much as the work does. A seller may book a token salary and take the rest as distributions, or pay itself well above what a manager would cost. Either way the booked figure is added back and replaced by the market cost, with payroll costs, of whoever will do the job after closing. If the buyer will run the business in person, the buyer's own draw belongs to the wider picture in Global Cash Flow: Testing the Borrower, Its Owners and Its Affiliates as One Repayment Source, and the study should say which treatment it chose.

Personal costs run through the business are a separate line. The code's general rule allows deductions for the ordinary and necessary expenses of carrying on a trade or business ^[34]; a seller's personal vehicle, family phone plans or travel that served no business purpose come back only where the ledger and the receipts identify them. An undocumented add-back is a request for the lender's trust, and a study should leave it out.

One-time items cut both ways. A legal settlement, a storm repair or a recruiting fee that will not recur can be added back once documented; a gain on selling equipment, an insurance recovery or a contract that will not be renewed must come out. The question is whether the item would recur under the buyer. A supposedly unusual cost that shows up in two of three years is simply a cost of doing business.

Rent paid to a related party is restated at market. Where a seller holds the building in a separate company, the rent it charged the business may be whatever suited the seller. After closing the buyer will pay the rent in its own lease, so the study swaps the related-party rent for that lease's rent, or for market evidence if the lease is not yet signed. Where the buyer takes the real estate as well, through an Eligible Passive Company, the regulation requires the lease between that company and the operating company, counting renewal options that only the operating company can exercise, to run at least as long as the loan ^[35]. The rent then becomes a transfer inside the borrowing group, and the global cash flow article covers how it is eliminated.

Table 1 sets out one assumed purchase: an operating business bought without its building for an assumed $1,700,000, with a requested 7(a) loan of $1,500,000. Its project numbers are assumptions and are marked so; only the rate inputs, the term, the floor and the goodwill amortization period carry citations. Table 2 applies the adjustments above to the seller's two latest years.

Rounded as shown; lines may not foot by one unit in the last place.

The table shows why reported net income cannot be read alone. It fell from $267,000 to $226,000 between the two years, which would worry a lender reading only the returns. Normalized cash flow moved the other way, from $246,000 to $262,000. The difference is the one-time items: a gain that flattered the earlier year and a settlement that depressed the later one. Net adjustments were -$21,000 in the earlier year and $36,000 in the later one, and the two-year average of normalized cash flow is $254,000.

The other lines do most of the damage to the seller's presentation. The replacement manager costs $92,000 against a booked salary of $40,000. Market rent of $96,000 replaces $60,000 of related-party rent. The reserve takes $20,000. None of these appears on the seller's return, and each is a cost the buyer will actually pay.

Coverage on History Against Coverage on the Buyer's Plan

Table 3 runs the coverage test on each measure of earnings, first at the quoted rate and then with the spread at the regulatory ceiling.

As the conventions line says, the binding minimum is the higher of two figures: the floor the site's SBA page gives for an initial acquisition, 1.25x on historical earnings ^[1], and the series' stated lender assumption, also 1.25x. Floor and lender assumption coincide in this example, which leaves 1.25x as the binding minimum whichever is read first. The quoted rate is 9.75 percent, made of prime at 7.00 percent ^[36] and a 2.75 percent lender spread, which is an assumption. On that rate the requested loan costs $235,386 a year in debt service.

Read the coverage lines from the top and the story is normalization. The seller's add-backs alone (interest, depreciation, the booked salary, personal costs and the one-time item, with nothing deducted) give $410,000 and coverage of 1.74x. Nothing stops a seller from presenting exactly that figure. The documented, normalized figure for the same year gives 1.11x, and the two-year average 1.08x. Both fall short. The request fails the historical test on each measure the site's page allows, the latest fiscal year and the average of the latest two ^[40].

The buyer's plan tells a happier story. It adds an assumed 6.0 percent growth and an assumed $45,000 of synergy to the latest year's normalized cash flow, reaching $322,720 and coverage of 1.37x. On the plan the request passes with room to spare, and the loan the plan would support at the binding minimum, $1,645,226, exceeds what the buyer asked for. That is exactly the figure the conventions set aside. On the site's statement of the rule for these categories a projection cannot meet the floor, and this purchase, with no real estate at all, cannot use the special-purpose exception ^[3].

What the historical test supports is $1,335,676 on the latest year, or $1,294,892 on the two-year average. The site's SBA page describes what follows for a purchase that cannot clear the floor on history: such a purchase must get smaller or change shape, and a study is often what reveals which of the two ^[41]. Here the request exceeds the larger historical figure by $164,324, a gap that a lower price, more equity or a different structure would have to close. Equity Injection and Sources and Uses: How a Study Shows Where Every Dollar Comes From sets out how the series measures equity once the supported loan is known.

The second column changes one input. The example's rate is variable, prime plus a spread, under the conditions 120.214 sets for variable rates ^[42]. With the spread at the 3.0 point ceiling that section's paragraph (d) sets over the base rate once a 7(a) loan exceeds $350,000 ^{[37] [43]}, the rate becomes 10.00 percent and coverage on the latest year slips from 1.11x to 1.10x. The rate moves coverage by a hundredth, while normalization moved it by well over half a turn. In this example the earnings line, not the rate, decides the answer, and that is where a study's effort should go. A fixed-rate loan would sit under a different maximum, the one SBA publishes from time to time in the Federal Register under 120.213 ^[44].

The term matters as well. A loan that buys a business without real estate, and without equipment whose useful life exceeds ten years, runs ten years or less under 120.212, which also asks for the shortest appropriate term given the borrower's ability to repay ^[38]. The model holds the whole loan to that ten-year term and does not split out any equipment whose life might allow longer. That short term is part of why purchases heavy in goodwill are hard to cover: the loan has to retire the price of the intangibles within a decade.

When the two historical measures part company, the study should print both and explain the gap rather than choose between them. A business whose latest year sits far above the one before is either improving or enjoying a year that will not come again, and only evidence from outside the returns can say which. Sizing on the stronger year is a bet that it repeats, and the study should say what supports that bet before a lender makes it.

The Buyer's Plan as a Second Test, Never a Substitute

None of this makes the buyer's plan worthless. The regulation tells SBA to weigh projected future earnings alongside the earnings history when it judges an ESOP loan ^[13], and the site's SBA page says that where an acquisition is involved a study reconciles projections with the historical earnings that set the floor ^[45]. The plan is read, but for a different purpose. History asks whether the business has earned enough to carry the debt. The plan asks whether anything about the change of owner will stop it earning that much again.

Several things change at closing, and none of them shows in the seller's returns. The seller leaves, and customer relationships, supplier terms and staff loyalty may leave too. SBA's buying guide warns that a bought business, lacking a set vision, infrastructure or outside guidance, could struggle while its new owner works out how to run it ^[46]. Integration costs arrive: the regulators' leveraged lending guidance asks whether projections leave an adequate margin for unanticipated merger-related integration costs ^[47], and it wants projections to carry one or more realistic downside cases reflecting the key risks of the deal ^[48]. A study should build the buyer's first year from the normalized history, strip out growth and synergies the market evidence does not support, and charge the transition its cost.

In the model, the rebuilt first year drops the plan's growth and synergy and assumes the business loses 8.0 percent of its normalized cash flow in the year after the seller leaves. That gives $241,040, coverage of 1.02x and a supported loan of $1,228,822, below both historical figures. The historical test still sizes the loan under the conventions, but the second test has found something the first could not see: even the smaller historical loan leaves the first year thin. A study would report that gap and the measures that answer it, such as a paid transition period for the seller, a working capital reserve or a loan set below the historical maximum. It would not use the second test to argue the first one away, in either direction.

The plan also has to carry every payment the structure creates. A seller note is the plainest case. If it pays during the loan, its payments belong in the debt service that the coverage ratio divides by. Among the limited sources of equity, the site's SBA page lists debt on full standby for as long as the loan runs, and with non-controlling minority investors such sources may make up no more than half of a 7(a) injection ^[49]. The site's page also says an initial acquisition's injection of 10 percent cannot be cut ^[50]. The equity rules belong to the sources and uses article. For coverage the point is plainer: a note that is being paid is debt service, wherever it sits in the equity count.

Goodwill: The Part of the Price Only Earnings Can Carry

Table 4 breaks the assumed price into what it buys.

Of the $1,700,000 price, $420,000 buys equipment and inventory and $1,280,000, or 75.3 percent, buys goodwill and other intangibles. The tax code counts goodwill, going concern value and the workforce in place as section 197 intangibles ^[51], and an amortizable section 197 intangible is written off ratably over 15 years from the month it was acquired ^[39]. Whether a given purchase gives the buyer that deduction is a tax question for the buyer's accountant; if it does, the example's figure is $85,333 a year, a deduction on the buyer's future returns that uses no cash. A lender reading those returns in later years should add it back just as it adds back depreciation, and a study's projection should keep it out of the cash flow line.

The loan runs on a faster clock. Under the regulation the term stops at ten years except where real estate, or equipment lasting longer than a decade, is being financed ^[38], so the loan pays off the price of goodwill well before the tax code finishes writing it off. Of the requested $1,500,000, $1,080,000, or 72.0 percent, sits above the tangible assets at their allocated price. Nothing behind that part of the loan can be sold apart from the business as a going concern. If the earnings stop, goodwill is worth little to a lender, so for most of the loan the coverage test on history is the main protection.

Nothing in Part 120 says how much of a purchase price a lender may finance against goodwill; the regulation's one sentence on changes of ownership simply permits the purchase ^[5]. A study does not value goodwill either. Where the site's page says a credentialed valuation is needed, that is a separate document from a separate professional ^[29]. What the study can do is show whether the earnings that justify the goodwill rest on things that will transfer with the sale.

What a Feasibility Study Adds: Evidence That the Past Will Repeat

A seller's history answers what the business did. A lender needs to know whether it will do it again for someone else, and that is a market question. The study's contribution is to test each condition that produced the historical earnings and report whether it still holds.

SBA's guide describes the main advantage of buying a going concern as an existing blueprint that can include an established customer base, defined operating expenses and fully trained employees ^[52]. Each part can be tested. For the customer base: how concentrated it is, how much of it depends on the seller personally, and whether the contracts can be assigned. For the expenses: whether the normalized budget matches what comparable operators pay, the subject of Operating Expense Evidence: Building an Expense Budget a Credit Officer Can Trace. For the staff: who is likely to stay, and what replacing those who go would cost. Beyond the blueprint lie the conditions the returns took for granted: demand in the trade area, rivals that have opened since the latest return, a lease or licence that has to transfer, a supplier or franchisor whose consent is required.

The method's usual standards apply with extra force. The site's methodology page calls a study an evaluation rather than advocacy, and it bars the analyst from holding any financial stake in whether the loan goes through ^[53]. On a purchase that matters doubly, because the buyer, the seller and any broker involved all want the sale to close. A study that reports historical coverage below the floor, together with the loan the history really supports, is doing its job.

Conventional bank loans follow the same logic under a different rulebook. No SBA floor applies; the bank's own policy governs. Appendix A to 12 CFR 365, which carries the agencies' joint guidance on real estate lending, asks that policy to set further standards for completed commercial properties, and for development and construction projects, scaled to each one's size and type ^[54]. One of those standards is a floor on net worth, cash flow and debt coverage, set for either the borrower or the underlying property ^[55]. The FDIC rule behind those guidelines, which binds FDIC-supervised institutions, reaches two kinds of credit: loans secured by liens on or interests in real estate, and loans made to finance permanent improvements to real estate ^[56]. A business purchase therefore falls inside it where property secures the loan or where the loan pays for permanent improvements, and the marina example combines a purchase with exactly such an improvement, a dock expansion. Worked Example: Conventional Bank Marina Acquisition and Dock Expansion Feasibility Study in Kentucky shows a purchase joined to an expansion: no program floor applies, the lender's assumed minimum binds, and its rent and occupancy inputs are placeholders a real study would replace with the marina's own rent roll and slip history. The added slips are new capacity, which only a projection can test, so a study keeps the existing operation, judged on its record, apart from the expansion, judged on evidence of demand.

Worked Example: SBA 7(a) Assisted Living Feasibility Study in Utah runs both tests on an SBA purchase of an operating facility. Its stabilized projection and the seller's last fiscal year give different answers, the historical one binds, and the example sizes the loan below the request instead of bending its assumptions toward the floor. Both are illustrations of the method built on labelled assumptions, not records of any loan.

Purchases Inside the 7(a) Figures: Why the Cells Mix Them With Everything Else

Start with the two classes the worked examples use. Assisted living without nursing care drew 2,232 ^[57] 7(a) approvals from FY2017 to FY2026, with a median loan of $752,450 ^[57] and an approval-cohort charge-off floor of 1.44 percent ^[57] for its FY2017 to FY2021 approvals. Marinas drew 220 ^[58] 7(a) approvals over the same years. Their charge-off floor is 0.00 percent ^[58], measured on 118 ^[58] disbursed loans of which 37 ^[58] are still open with their status withheld, and their cancellation floor for FY2017 to FY2024 approvals is 14.44 percent ^[58]. A floor at zero says only that no loan in that cohort has been charged off yet; it is not a measure of risk for the next marina purchase, as The Approval-Cohort Charge-Off Floor: Why a Published SBA Loss Rate Can Only Understate explains.

Across the whole program, SBA approved 56,130 ^[59] 7(a) loans in FY2026, counting approvals later cancelled, for $32.43 billion ^[60] of gross approvals. For 7(a) approvals of FY2017 to FY2021 that were disbursed, the charge-off floor to date is 6.33 percent ^[61], an approval-cohort floor rather than a final rate, and the share charged off inside five years of approval is 3.72 percent ^[62]. Of the approvals of FY2017 to FY2024, at least 11.24 percent ^[63] were cancelled, a floor of the same kind; Cancellation Is Not Charge-Off: The Two Ways an SBA Approval Can End Without Repayment explains the difference.

None of these numbers belongs to purchases alone. A buyer, a builder and a borrower refinancing equipment all sit in the same class figure, because the series cuts its cells three ways, by state, by asset class and by program, and change of ownership is not one of the cuts. What the SBA Loan File Cannot Tell You: The Limits of FOIA Data in Underwriting explains why no finer split is offered.

A study should use these figures as a frame, never as a probability for one buyer. They say how often loans in a class have ended in charge-off or cancellation, as floors, across every purpose the program finances. They say nothing about whether a particular seller's earnings will hold, which is the question the historical test and the market evidence exist to answer. Where a class rate rests on fewer than 30 loans, the dataset withholds it and this series does not print it.

Loan Data Behind This Article

Every figure in this table comes from the Loan Analytics loan dataset, analytics-loan-data freeze-3 (commit 360c856), and carries its key. SBA rates are approval-cohort floors and are withheld when fewer than 30 loans stand behind them.

A Checklist for an Acquisition File

The list below gathers the method into the order a credit officer might read it.

• The seller's returns or statements for the past three years, with IRS tax verification, are in the file ^[15], and the study reconciles them to each other and to the bank deposits.
• Every add-back names the document behind it, as the site's methodology page asks of every material assumption ^[31], and undocumented add-backs are left out.
• The seller's booked salary is replaced by the market cost of whoever will do the work after closing.
• Depreciation added back is matched by a replacement reserve drawn from the asset list.
• Related-party rent is restated to the rent in the buyer's own lease, and where the buyer also takes the property through an Eligible Passive Company, that lease runs at least as long as the loan ^[35].
• One-time items are documented, and each is checked for recurrence across the years in the file.
• Coverage is printed on the latest fiscal year and on the two-year average, the two measures the site's SBA page names, against the binding minimum, with the request and the supported loan side by side ^[40].
• The buyer's plan is shown, rebuilt from the history, with growth and synergies only where outside evidence supports them ^[20].
• Every payment to a person connected with the business is identified as purchase price or as pay for services ^[7].
• Seller notes that pay during the loan are inside debt service, and any standby terms of the kind the site's SBA page describes are written down ^[49].
• The goodwill share of the price, and the part of the loan above tangible assets, are stated; the study states no value for either ^[51].
• The market evidence behind the history is laid out: customers, competitors, the lease, the staff and any licence that must transfer ^[52].

Related Pages on Loan Analytics

• The Loan Analytics methodology series (all articles)
• How a feasibility study is done: the Loan Analytics methodology
• SBA feasibility studies (7(a) and 504)
• Bankable feasibility studies for conventional loans
• Loan data by state
• Loan data by asset class
• Worked examples (case studies)
• Worked Example: SBA 7(a) Assisted Living Feasibility Study in Utah
• Worked Example: Conventional Bank Marina Acquisition and Dock Expansion Feasibility Study in Kentucky
• SOP 50 10 8.1 for Lenders: The Four Acquisition Categories, the Historical Coverage Test, and What Changes on 1 October
• The Small Business Acquisition Market Before 1 October: What the Numbers Look Like Going In
• A Failed DSCR Is Rarely a Failed Deal. It Is Usually a Failed Structure.
• Debt Service Coverage in a Feasibility Study: How the Ratio Is Built, and Which Floor Binds
• Operating Expense Evidence: Building an Expense Budget a Credit Officer Can Trace

Commission a Feasibility Study

Loan Analytics prepares lender-grade feasibility studies for SBA 7(a), SBA 504, USDA Business and Industry, conventional and EB-5 financing, built on the methods this series sets out. A study is not an appraisal: it tests whether a project's market, costs and cash flow can carry the debt a lender is asked to approve. To discuss a study for your project, contact Loan Analytics.

Daniel Smith, MAI, Loan Analytics