equity & exitsBlog · Buying a Business
Same Deal, Two Underwriters: Why One SBA Lender Says Yes and Another Says No
Here's something unsettling about buying a business with SBA financing. You can have one deal, one price, and one buyer, and it gets approved on one lender's desk and declined on another's.
Nothing about the business changed in between. What changed was whose desk it landed on.
Let's walk through exactly how that happens, and the one thing you can control before it happens to you.
First, why 1.25 matters right now
DSCR, or debt service coverage ratio, is the business's cash flow divided by its annual loan payments. A 1.25x DSCR means the business earns $1.25 for every $1.00 of debt payments.
For a long time, SBA's own floor for 7(a) loans was 1.15x, and many lenders layered a 1.25x policy on top. That changed this fall. Under SBA's updated rulebook, SOP 50 10 8.1, effective October 1, 2026, most 7(a) business acquisition and owner-buyout loans now need a 1.25x DSCR, and lenders can no longer lean on projections to get there. So whether a deal clears 1.25 is now a bigger deal than ever.
The deal
In this example, a business is listed at $2 million. A buyer negotiates a price and applies for a $1.8 million SBA 7(a) loan at 9.75% over a 10-year term. The annual debt service on that loan works out to about $282,000.
Before any addbacks, the business shows $275,000 in earnings. The seller's broker has prepared an addback schedule with a market-rate justification for every adjustment, using the same formula on every line:
Actual spend − market rate = addback
The file goes to underwriting, and this is where it splits.
Underwriter A: approved at 1.63x
| Addback | Actual spend | Market rate | Addback |
|---|---|---|---|
| Legal fees | $20,000 | $5,000 | $15,000 |
| Vehicle expenses | $15,000 | $5,000 | $10,000 |
| Owner salary | $240,000 | $80,000 (general manager) | $160,000 |
| Total | $185,000 |
Legal and vehicle are straightforward, and nobody's going to argue those. Then comes the big one. The owner pays himself $240,000. Underwriter A estimates that a general manager capable of running this business would cost $80,000, so the addback is $160,000.
- Normalized cash flow: $275,000 + $185,000 = $460,000
- DSCR: $460,000 ÷ $282,000 = 1.63x
That's comfortably above 1.25. The loan is approved, the buyer closes, and life goes on.
Underwriter B: declined at 1.24x
Now rewind and send the same file to a different desk.
Underwriter B agrees on legal ($15,000) and vehicle ($10,000). No argument there.
Then he looks at the owner-salary comparison a little longer, and at the job listings behind it. They're entry-level general manager postings, with no mention of vendor negotiation, no mention of sales, and no mention of the relationships this seller actually built the business on. He rejects the comparison as too narrow and prices the market rate for everything the role really covers: sales, staffing, and vendor relationships. That's the seller's actual job, at $190,000 instead of $80,000.
| Addback | Underwriter A | Underwriter B |
|---|---|---|
| Legal fees | $15,000 | $15,000 |
| Vehicle expenses | $10,000 | $10,000 |
| Owner salary | $160,000 | $50,000 |
| Total addbacks | $185,000 | $75,000 |
| Normalized cash flow | $460,000 | $350,000 |
| DSCR (÷ $282,000) | 1.63x: approved | 1.24x: declined |
It's one formula, with two line items identical and one line item $110,000 apart. At 1.24x, the deal lands just below the 1.25 minimum, and the loan is declined.
The business didn't change. The opinion did.
The real lesson: it's never the formula, it's the market rate
Every addback on that schedule used the same formula. Nobody disputed that the seller spent $20,000 on legal, $15,000 on vehicles, or paid himself $240,000.
The entire $110,000 disagreement lived inside one number that neither underwriter could look up in a table: what does it actually cost to replace this owner?
The gap between $460,000 and $350,000 wasn't about whose story was true. It was about whose replacement-cost estimate each underwriter was willing to accept. You can't control which underwriter reviews your file. You can control how defensible your numbers are before anyone sees them.
If you're the buyer: stress test before you fall in love
- Don't assume the seller's stated earnings will survive underwriting as presented. Ask for the documentation behind every addback before you get emotionally attached.
- Build your own conservative case. Run the DSCR at the optimistic number and at a meaningfully discounted one.
- If the deal only works at the optimistic number, you don't have a deal. You have a bet that a lenient underwriter picks up your file.
If you're the seller: paper trail over clever addbacks
Clean, documented books matter more than clever addbacks. Every addback should come with a paper trail, not just an explanation. For the owner's salary in particular, price the replacement on the full scope of what you do (sales, vendor relationships, operating decisions), not on a generic job title. The buyer isn't the only one who has to believe your numbers. A stranger reviewing your file months from now has to believe them too.
Frequently asked questions
What DSCR do SBA lenders require for a business acquisition? As of October 1, 2026, SBA's SOP 50 10 8.1 requires 1.25x for most 7(a) acquisition and owner-buyout loans, up from 1.15x. Individual lenders can require more. Check with your lender, because policies change.
How is the owner's salary addback calculated? Actual owner compensation minus the market cost of a hire who could do the owner's full job. The size of that addback depends heavily on how the underwriter defines the role.
Why would two lenders treat the same addback differently? Because "market rate" for a role is a judgment call. Underwriters can disagree on what the job includes and what it costs, and a single disagreement can move DSCR across the approval line.
How do I stress test a business acquisition? Calculate DSCR using the seller's full addbacks, then again with the owner-salary addback discounted. If the deal fails the conservative case, renegotiate price, terms, or structure before you commit.
Find out if your addbacks survive a stranger's scrutiny
Whether you're buying and need to stress test a deal, or selling and need your addbacks to hold up in underwriting, this is where we start. Request your free Forensic Exit Audit.
This scenario is illustrative. Actual underwriting standards, addback treatment, rates, and lender discretion vary by lender and transaction. This article is for education only and isn't legal, tax, or financial advice. Consult your lender and qualified advisors before any acquisition decision.
Sumathi Sivakumar | Equity & Exits | DRE #02159366