Guide
Why lenders decline acquisition finance
The reasons deals actually get declined, ordered by how often they are the real reason, and which are fixable.
Declines are rarely mysterious
Buyers tend to imagine a decline as a fine judgement on the numbers. Most are not. Most are one of a small set of recurring problems, and a striking proportion of them were visible weeks earlier to anyone who knew to look.
The other thing worth knowing is that the stated reason is often not the real one. "It does not fit our appetite" is a polite way of ending a conversation, and it tells you nothing you can act on. What follows is what is usually underneath it, roughly in order of how often it turns out to be the actual cause.
One: the price does not leave enough to service the debt
By some distance the most common. The price was agreed on a multiple of revenue, fees or headline earnings, and nobody rebuilt the profit figure the way a lender does.
A lender strips out what will not recur, adds back the seller's drawings, and then puts back a proper cost for whoever does that work after completion. What is left is what services the debt. A price that is entirely reasonable commercially can leave a figure that does not cover the repayments, and no amount of goodwill about the business changes that arithmetic.
Fixable? Yes, but only before the price is agreed. After that it means reopening a negotiation you thought was closed, usually by deferring more of the consideration. Read valuation basics and what lenders look for before heads of terms, not after.
Two: the recurring revenue is not as contracted as it looked
The particulars said recurring. Diligence found rolling arrangements with a month's notice, or work that renews because a relationship exists rather than because a contract does, or a schedule that cannot be reconciled to the sales ledger.
This is the classic failure in the sectors we cover, because it is the whole basis on which these businesses are valued. Read how lenders assess recurring revenue for the tests that get applied.
Fixable? Partly. You cannot make a contract exist that does not. You can price it correctly, restructure the deal so more of the consideration depends on the income surviving, and produce a reconciled schedule instead of asking the lender to take the total on trust.
Three: the seller is central and is leaving
The question a lender always asks is what happens on the day the seller stops answering the phone. If the answer is that a meaningful share of the customers or fees go with them, the deal is being asked to fund something that is about to become smaller.
Fixable? Usually, and it is a structuring problem rather than a lending one. A proper handover period with the introductions actually scheduled, deferred consideration tied to retention, clawback that outlasts the risk, and restrictive covenants drafted by someone who expects them to be tested. See succession and retirement sales.
Four: the buyer cannot show they can run it
At this size the buyer is a large part of the credit decision. A first-time buyer with no sector experience, no management team and a hundred per cent debt-funded purchase is a difficult proposition however good the business is.
Fixable? Often, by changing the shape rather than the business. Bringing in a manager who has run one, retaining the seller for longer, increasing your own contribution, or partnering with a trade buyer all move the assessment. See equity contribution and MBO, MBI and BIMBO explained.
Five: concentration
One customer, one contract or one introducer is too much of the revenue, and its loss would take the business below the point where the debt works. Lenders are not looking for zero concentration, which barely exists in owner-managed businesses. They are looking for whether the structure survives the largest single loss.
Fixable? Not quickly, but manageable. Evidence of tenure, contractual protection, and a downside case you produced yourself all help. See customer concentration.
Six: the information does not hold together
The management accounts do not reconcile to the filed accounts. The contract schedule totals something different from the sales ledger. The forecast has no stated assumptions. Two documents give different staff numbers.
This one is worse than it looks, because it does not just fail on its own terms. It makes a lender re-read everything else you have given them more sceptically, and the deal starts carrying a discount that nobody names.
Fixable? Entirely, and cheaply, before you send anything. Our document checklist is organised around this.
Seven: something structural nobody checked
A large contract with a change of control clause. An accreditation held in the departing owner's name. An approval from a major client that is reviewed when ownership changes. A lease that cannot be assigned. Employment obligations that transfer with the work and were never priced.
These are sector-specific and they are the reason the sector pages on this site exist: accountancy practices, HVAC, fire and security, pest control, electrical and M&E and facilities management.
Fixable? Almost always, if found in time. Almost never, if found the week before completion.
Eight: nobody funded the working capital
The purchase price was funded properly and the business then ran out of cash in month three, because the wage bill starts immediately and the income arrives on the old billing cycle. Sometimes this shows up as a decline, more often as a facility that is too small and a business under pressure from the start. See working capital.
Nine: it went to the wrong lender
The one buyers almost never consider, and the reason this site exists.
A perfectly fundable business is declined because it was assessed against a template built for a different kind of business. The value sits in contracts rather than assets, the lender looks for tangible security, finds very little, and declines something that a funder with sector experience would have looked at properly.
What makes this one expensive is that it does not feel like a mistake. It feels like information: you were told no, so you conclude the deal does not work. Buyers abandon fundable acquisitions on the strength of a decline from somebody who was never the right person to ask.
Fixable? Yes, and it is the cheapest fix on this page. We know this market and we know specific people who have funded businesses like the one you are buying, so the same proposal goes to someone who recognises it. That is the whole of what we do, and why Reads is honest about where it does not add much.
What to do with this list
Read it before you apply rather than after you are declined. Almost everything above is cheaper to deal with while the deal is still being shaped than once a credit committee has said no, partly because a second application on a materially unchanged proposal tends to get a similar answer.
If several of these apply to your deal, that is not a reason to stop. It is a reason to fix the ones you can and structure around the ones you cannot, which is a conversation worth having before you have spent money on diligence. Start with the buyer journey if the deal is still early, or tell us what you are buying and we will tell you what a lender is likely to stop on.
Find the problem before a lender does
Most of the reasons below are fixable if they are found early and expensive if they are found late. Tell us what you are buying and we will tell you what a lender is likely to stop on.