Acquisition financing is usually declined or cut for a short list of reasons: the price needs more debt than verified EBITDA supports, the add-backs cannot be proven, the equity beneath the loan is too thin or not yet committed, the business depends on the seller, one customer carries too much of the revenue, the trend is down, or the package is stale or incomplete. Most of these are about structure or evidence rather than the company itself, and each has a fix that can be put in place before the deal goes to lenders.
- Most common structural reason
- The ask needs more leverage or debt service than the EBITDA supports
- Most common evidential reason
- Adjusted EBITDA not supported by the statements, the returns and a proof of cash
- Common senior reach
- Senior cash-flow lenders commonly lend 2x to 3.5x EBITDA
- What a decline often means
- Wrong structure, wrong evidence or wrong lender, not a bad company
- What changes the outcome
- A package that answers the lender's questions before it asks them
The reasons, and what fixes each
Lenders rarely write long decline letters. The reason they give is often the first one they found, not the only one. Read against the file, though, acquisition declines fall into a pattern, and each item on it has a repair.
| Reason for decline | What the lender saw | What fixes it |
|---|---|---|
| Leverage above the lender's box | Senior debt asked for is more turns of EBITDA than the lender will lend | A unitranche or subordinated layer, more seller paper or rollover, more equity, or a lower price |
| Coverage too thin | Cash flow after capex and taxes barely covers the new payments | Lighter amortization, less cash interest on junior debt, a seller note that accrues, or less debt |
| Earnings the lender cannot verify | Adjusted EBITDA well above reported; add-backs without support | Add-backs documented line by line; a quality of earnings with a proof of cash |
| Thin or uncommitted equity | Little real equity beneath the loan, or investors who have not committed | Committed equity with its source shown; a rollover that counts as equity |
| Dependence on the seller | The seller holds the key relationships and is leaving | A transition agreement, key people retained, a named successor, a rollover that keeps the seller invested |
| Customer concentration | One customer or contract carries a large share of EBITDA | Contract terms and history, a structure that survives its loss, lower leverage |
| A falling trend | The trailing months are below the year the price was set on | Re-size on the lower figure and restructure the price around it |
| A stale or incomplete package | Last year's figures, no year to date, numbers that do not tie | The target's latest full year and year to date, a complete checklist, a model that reconciles |
The structural declines: leverage, coverage and equity
The largest category is arithmetic. A buyer agrees a price, subtracts the equity it has, and asks lenders for the rest. Lenders work the other way: they take verified EBITDA, apply their leverage limit, and check that cash flow covers the payments. When the two numbers do not meet, the financing is declined or cut even though the company is sound. Whether a lender will finance the purchase price works through that gap.
The tests are specific. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA; unitranche lenders stretch further. Conventional bank lenders commonly look for debt service coverage of at least 1.25x. Take a company with cash available for debt service of 1,200 against proposed annual payments of 1,000. It clears a bare coverage test of one times, but not 1.25x, and the same deal needs either lower payments or more verified cash flow. Lower payments can come from lighter amortization, a longer maturity, a seller note that accrues instead of paying cash, or simply less senior debt with more equity behind it.
How earnings are counted matters as much as the ratio. Lenders deduct market pay for whoever will run the company, and they take out maintenance capital spending and taxes before testing coverage, which is why a deal priced on the seller's most generous figure can look covered to the buyer and uncovered to the lender; see SDE vs EBITDA.
Equity is the other structural lever. Lenders want real equity beneath their loan, and they read how it is committed as closely as how much there is. A seller note is debt, not equity, and its cash payments count in coverage. A rollover counts as equity only if the seller cannot take it out early; see rollover equity.
A structural decline says the financing asked for was the wrong size or shape. It does not say the company cannot be financed.
The evidential declines: when the lender cannot see what you see
A buyer who has spent weeks with the seller believes the earnings. A lender reading the file cold believes what it can reconcile. When the adjusted figure sits well above the reported one and the add-backs are a list of round numbers, the lender has two choices: size on the reported figure, which usually makes the loan too small for the deal, or decline. Many decline.
The repair is documentation. Each add-back needs a source: the ledger entry, the invoice, the payroll record, the one-time event. The statements must tie to the returns, and the difference must be explained where they do not; see seller financials vs tax returns. A quality of earnings report moves the argument from the seller's word to an accountant's work.
Trend is evidence too. A company whose latest year is weaker than the year the price was based on will be underwritten on the latest year. Lenders need the target's latest full year of figures and a year-to-date statement through the last month-end, never an older year, and a deal built on stale figures tends to be declined when the new ones arrive. If earnings have fallen, the deal has to be restructured around that fact; see financing an acquisition with declining earnings.
The risk declines: people, customers and the business model
Some declines are about what could break the cash flow after closing. They are judgement calls, and lenders differ on them, which is why the same deal can be declined by one lender and approved by another.
- Transition. Where the seller is the business, lenders ask what happens when the seller leaves. A buyer with industry or management experience, key people who are staying, a named successor and a written handover answer the question. See buying from a retiring owner.
- Concentration. A customer that carries a large share of EBITDA is a single point of failure. Contract length, renewal history and the relationship's depth below the owner all matter; see customer concentration in an acquisition.
- Cyclicality and capital intensity. A company whose earnings swing with an end market, or that must reinvest heavily to stand still, supports less debt than its peak EBITDA suggests. Lenders size such companies on a normalized year and leave more room under the covenants.
- Change-of-control consents. Key contracts, licenses or leases that need a counterparty's consent to survive the sale are a risk until the consent is in hand; see change-of-control consents.
Lender-fit declines: the right deal, the wrong lender
Lenders have boxes: deal sizes they like, industries they avoid, structures they will not do, sponsors they prefer. A bank that lends conservatively against steady earnings will decline a deal that needs unitranche leverage, and a private credit fund that wants sponsor-backed borrowers may decline a founder's management buyout it would have liked with a fund behind it. An asset-heavy distributor may be a poor fit for a cash-flow lender and an easy one for an asset-based lender, which lends against receivables and inventory rather than EBITDA.
None of these is a judgement on the company. They are about fit, and they are knowable before the letter of intent. At this size the company has usually outgrown SBA, whose 7(a) loans go up to $5 million, so the field is banks, private credit funds, asset-based lenders and junior capital providers, each with its own box.
One decline is not the market's answer
A decline can mean only that the deal was outside one lender's box. Midas Partners's book holds 1,800+ lenders; 1,148 write term and private credit and 235 write asset-based loans and lines, and a deal one of them turns down may sit squarely inside another's. The skill is not sending the same file to more lenders; it is sending the deal to the lenders whose box it fits, with the questions already answered.
That is the purpose of a complete package. Once a borrower's documents are in, Midas Partners builds the financing model, lender presentation, blind teaser and underwriting memo in a day; built by hand, the same package takes at least a week. The model shows leverage and coverage on the lenders' own definitions, the memo addresses concentration, transition and the trend before a credit officer raises them, and the figures are the latest ones. Senior bankers run every engagement and a senior banker checks every page. Midas Partners does not take a deal to market on incomplete figures: a missing year or an unreconciled add-back is fixed first, because a lender that has declined a deal for missing evidence is slow to look at it again. The documents lenders ask for are in what lenders need to finance an acquisition.
Common questions
- What is the most common reason acquisition financing is declined?
- A price that needs more debt than verified EBITDA supports at the lender's leverage and coverage limits. It is often combined with add-backs the lender cannot verify, which lowers the EBITDA it will count.
- Can I go back to a lender after a decline?
- Yes, if the reason has been fixed, such as more equity, a restructured seller note or documented add-backs. Resubmitting the same file unchanged rarely changes the answer.
- Does a decline from one lender mean the deal cannot be financed?
- No. Lenders differ in size range, industry appetite, structure and how much leverage they will give. A deal outside one lender's box may fit another's, provided the structure and evidence are sound.
- Will a seller note help if the loan is declined for coverage?
- Only if it does not add to cash debt service. A note whose interest accrues and is paid after the senior loan helps coverage; a note paid in cash from day one usually makes the problem worse.
- Why do lenders want the latest full year of figures?
- Because they underwrite the company as it is now. A deal priced on an older, stronger year will be re-underwritten on the latest one, and lenders need it before they can decide.