Most buyers focus on the purchase price; lenders focus on something else entirely

When a business owner decides to acquire another business, most of their attention goes to the price: is it fair, is there room to negotiate, does the multiple stack up against similar businesses in the industry. That’s a reasonable place to start as a buyer, but it’s not where a lender starts at all.

A lender isn’t assessing whether the price is fair. They’re assessing whether the business, once acquired, will generate enough reliable earnings to service the debt being used to buy it. Those are two different questions, and a buyer who has only answered the first one is often surprised by how a lender responds to the second.

Why “can I afford it” and “will a lender fund it” are different questions

A buyer might have the deposit, the experience, and a clear view of the opportunity, and still find the acquisition difficult to fund if the target business’s earnings don’t hold up to scrutiny, or if the deal is structured in a way that makes the lender’s security position weak. Affordability, from the buyer’s perspective, and fundability, from the lender’s perspective, don’t always align.

The gap between what a buyer thinks makes a strong case and what a credit assessor actually weighs

Buyers often present the strength of the opportunity: growth potential, synergies, their own track record. Credit assessors are weighing something narrower and more specific: normalised historical earnings, the sustainability of those earnings under new ownership, and the security available if things don’t go to plan. A compelling story about upside rarely offsets weak historical numbers.

What lenders are really assessing when they look at an acquisition

The target business’s earnings

Unlike most commercial lending, acquisition finance is assessed largely on the earnings of the business being purchased, not solely on the buyer’s personal or existing business financials. This means the quality and sustainability of the target’s numbers matter as much, if not more, than the buyer’s own position.

Sustainability of revenue and profit

A strong three-year earnings history is a good starting point, but lenders are ultimately asking whether that performance will continue under new ownership. A business that’s performed well because of the current owner’s personal relationships, industry standing, or hands-on involvement presents a different risk profile to one whose earnings are driven by the business itself, its systems, contracts, and customer base.

The buyer’s experience and ability to run the business post-settlement

Lenders also weigh whether the buyer has relevant industry experience or a credible plan for running the business post-settlement. A buyer moving into a completely unfamiliar industry, with no transition support from the vendor, is a materially different proposition to an experienced operator acquiring a business in a sector they already understand.

How lenders assess the target business itself

Normalised earnings and add-backs

Most small and medium business financials include owner-related add-backs: above-market wages, personal motor vehicle expenses, discretionary spending run through the business. Lenders will normalise these to arrive at a true earnings figure, and the quality and defensibility of those add-backs often determines how much a lender is willing to support. Aggressive or poorly substantiated add-backs are one of the fastest ways to undermine a lenders confidence in the numbers.

Customer concentration and key-person risk

A business that generates a large share of its revenue from one or two customers carries meaningfully more risk than one with a diversified customer base, because losing a single relationship could materially impact the business's ability to service debt. Similarly, a business heavily reliant on the current owner’s personal relationships or technical expertise, key-person risk, raises questions about what happens to those earnings once that person exits.

Quality of financial records and how far back they need to go

Lenders typically want two to three years of financial statements and tax returns for the target business, along with current management accounts. Incomplete records, inconsistent bookkeeping, or a business that's been run informally through a family trust with limited documentation all slow the process down and can reduce a lenders confidence, regardless of how the business actually performs.

How the deal is structured changes what’s fundable

Asset purchase vs share purchase

In an asset purchase, the buyer acquires specific assets and, often, goodwill, while the existing entity and its liabilities remain with the vendor. In a share purchase, the buyer acquires the entire entity, including its existing liabilities and obligations. Lenders generally view asset purchases as lower risk, because the buyer isn’t inheriting unknown historical liabilities, and this can directly affect how much a lender is prepared to fund.

Goodwill vs tangible assets, and why goodwill is harder to lend against

Lenders are far more comfortable lending against tangible, identifiable assets, plant, equipment, property, than against goodwill, which represents the value of the business’s reputation, customer relationships, and future earning potential rather than something that can be physically secured. A deal that’s heavily weighted toward goodwill, common in service-based businesses, often requires a larger deposit or additional security to get funded.

Vendor finance and how it affects the lender’s position

Some acquisitions may include an element of vendor finance, where the seller finances part of the purchase price and is repaid over time, often subordinated to the primary lender. This can help bridge a funding gap, but lenders will assess how it’s structured carefully, since it affects both the buyer’s total debt servicing burden and the lender’s security position relative to the vendor’s.

What buyers get wrong when approaching acquisition finance

Assuming the deal is fundable because the price seems fair

A fair price and a fundable deal are not the same thing. A buyer can negotiate a genuinely good price and still struggle to secure finance if the earnings quality, customer concentration, or deal structure don’t stack up from a lender’s perspective.

Leaving finance until after heads of agreement is signed

Many buyers only start the finance conversation once they’ve agreed terms with the vendor, at which point they're working against a settlement timeline with limited room to renegotiate price or terms if the finance doesn’t come together as expected. Involving a lender, or at least understanding likely lending appetite, before signing gives a buyer far more room to move.

Underestimating working capital needs post-settlement

Buyers frequently focus their funding request entirely on the purchase price and overlook the working capital required to operate the business through the transition period. A deal funded to the exact purchase price, with nothing held in reserve, can leave a new owner exposed in the first few months of ownership, precisely when cash flow disruption is most likely.

Why early involvement changes the outcome

Getting finance-ready before due diligence starts

A buyer who understands their likely borrowing capacity, and has identified potential issues with the target’s earnings or structure, before due diligence begins is in a far stronger position than one working this out for the first time under deal pressure.

How pre-assessment strengthens a buyer’s negotiating position

A buyer who can demonstrate credible, pre-assessed finance is a more credible party in negotiations, particularly in competitive situations where a vendor is weighing multiple offers. Certainty of funding can matter as much as price.

The role of the accountant in sense-checking the numbers before a lender ever sees them

Accountants are usually the first professional a buyer engages once a target is identified, and are well placed to sense-check normalised earnings, flag customer concentration or key-person risk, and identify structural issues, asset versus share purchase, goodwill weighting, before the deal reaches a lender. Catching these issues early can be the difference between a deal that funds smoothly and one that stalls, or falls over, during due diligence.

A good business isn’t automatically a fundable deal

Acquisition finance is assessed differently to most other forms of commercial lending, because the earnings being relied on belong to a business the buyer doesn’t yet own. Getting a lender comfortable requires more than a fair price and a good opportunity. It requires normalised, defensible earnings, an appropriate deal structure, and preparation that starts well before terms are agreed.