Common Reasons Business Acquisition Deals Die in Underwriting

Business acquisition deals can come with a lot of emotion. From start to finish, the process can be a journey through highs and lows. More than half of business acquisition deals that go out to market don’t close for one reason or another. While each case is unique, there are recurring themes that contribute to these outcomes. In this article, we’ll delve into the top reasons why business acquisition deals die in underwriting, shedding light on common pitfalls and offering insights to help proactively navigate the underwriting process effectively.

Here are the most common reasons business acquisition deals die in underwriting:

1. Cash Flow: At the heart of every successful business lies a healthy cash flow. Unfortunately, inadequate cash flow projections or inconsistencies in financial documentation can plague acquisition deals. Lenders scrutinize any inconsistencies, adjustments, or normalization of cash flow as they assess the borrower’s ability to repay the loan. When documentation fails to align with historical performance or lacks credibility, lenders hesitate to proceed, fearing repayment risks. As such, precise attention to cash flow forecasting and clear financial reporting are imperative to instill confidence in lenders during underwriting.
2. Seller’s Notes: Seller financing, in the form of seller’s notes, can be a double-edged sword in acquisition deals. While it demonstrates the seller’s confidence in the business’s future success, conflicting terms or unrealistic expectations can derail underwriting efforts. Lenders assess the terms of seller’s notes, including interest rates, repayment schedules, and collateral arrangements, to evaluate the overall risk exposure. Misalignment between buyer and seller expectations, coupled with unfavorable terms, often leads to an underwriting impasse. Additionally, when dealing with the Small Business Administration (SBA), it’s important to ensure that everything we are doing meets their requirements. Effective negotiation and clear communication between all parties are crucial to navigate this potential stumbling block.
3. Inaccurate Information: Transparency is the cornerstone of underwriting success. Yet, inaccurate or incomplete information provided during the due diligence process can cast a shadow of doubt over the entire transaction. Whether it’s undisclosed liabilities, inflated asset valuations, or undisclosed related-party transactions, any discrepancies undermine the lender’s confidence in the deal’s viability. Thorough due diligence, conducted by both buyers and sellers, is essential to uncover any discrepancies early on and address them transparently to mitigate underwriting hurdles.
4. Buyer Background: Lenders place considerable emphasis on the buyer’s background and experience in the industry when evaluating acquisition deals. Lack of relevant industry experience or a questionable track record can raise red flags during underwriting. Additionally, concerns related to creditworthiness, character, and capacity to manage the acquired business can complicate the underwriting process. Buyers must demonstrate their competence, commitment, and financial stability to reassure lenders of their ability to successfully execute the acquisition and repay the loan.
5. Collateral Objections: Collateral serves as a safety net for lenders, providing assurance of loan repayment in the event of default. However, disagreements over collateral valuation or insufficient collateral coverage can impede the underwriting progress. Lenders meticulously assess the value and liquidity of proposed collateral to mitigate risk exposure. Disputes over collateral adequacy or encumbrances on key assets often necessitate negotiations between buyers and lenders to bridge the valuation gap and alleviate underwriting concerns.

Navigating the underwriting process in business acquisition deals requires diligence, transparency, and collaboration among all participants. By addressing common pitfalls borrowers can enhance the likelihood of underwriting success and propel their acquisition endeavors forward. The Bank of Tampa’s team of SBA experts aim to help entrepreneurs with the knowledge and resources they need to overcome underwriting hurdles and realize their business acquisition dreams.

If you are interested in learning more about SBA lending and what we can do for you, please feel free to reach out to me directly at bwilliams@bankoftampa.com.

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