The QofE Came Back Low, Now What?

Why This Happens More Often Than You'd Think

Sellers present their best numbers. That's not deceptive; it's human nature. They'll typically show you trailing twelve months that capture their strongest recent period.

Then the QofE provider digs into the current year, normalizes for one-time items, and suddenly a different picture emerges.

Common culprits behind the drop:

• Lost a major customer or contract earlier this year

• Increased owner compensation or new hires hitting the P&L

• One-time revenue in prior periods that won't repeat

• Rising costs (labor, materials, rent) compressing margins

• Simple seasonality that the TTM numbers masked

Here's what matters: this isn't necessarily a reason to walk away. Businesses have ups and downs. The question is whether you can structure around it and whether the seller will work with you to get there.

The Financing Math Problem

SBA lenders typically require 1.15x to 1.25x debt service coverage ratio at minimum. They're underwriting the business's ability to service the loan from cash flow. When YTD shows 1.0x, you're below the floor.

What this means practically:

• Your original $5M loan was sized based on stronger historical cash flow

• Lower DSCR means lower supportable debt

• The lender comes back with a reduced approval (maybe $4M or $4.2M)

• You now have a gap between what you can borrow and what you agreed to pay

Let's put real numbers on it:

• Original deal: $6M purchase price, $5M SBA loan, $1M equity

• Post-QofE reality: Lender will only do $4.2M based on current cash flow

• The gap: $800K that has to come from somewhere

That $800K gap is either coming from you (more equity), the seller (restructured terms), or the deal falls apart. For most buyers, putting in another $800K of equity isn't realistic. Which means the seller conversation is coming.

The Restructuring Playbook

You've got several tools available. The right one depends on your financing structure and what the seller will accept.

Option 1: Reduce the upfront purchase price

The most straightforward path. Seller takes less cash at closing, deal size shrinks to match what financing supports. Clean and simple, but often the hardest for sellers to swallow emotionally.

Option 2: Forgivable seller note for the balance

This is typically the best option for SBA deals because SBA loans prohibit traditional earnouts. That makes seller notes the primary restructuring tool.

The structure works like this:

• Seller "lends" you the gap amount ($800K in our example)

• Note is subordinated to SBA debt and on full standby (no payments during the SBA loan term), or has relatively low ongoing payments

• Structure it as forgivable over 2-5 years, and position it as “refinanceable” much sooner

• Seller gets credit for their full purchase price, just not all in cash at closing

The refinance angle is key here. SBA allows refinancing once the loan is seasoned. If the business rebounds over the next 18-24 months, you refinance with a new SBA loan at the higher supportable amount and pay off the seller note from proceeds. The seller gets a realistic path to their full proceeds, just with a small portion slightly delayed.

Option 3: Earnout tied to performance recovery

This can be a better approach for larger non-SBA deals where earnouts are permitted. If the business returns to prior performance levels, seller gets additional payments. It aligns incentives nicely since the seller presumably believes in the business. For conventional financing, earnouts can be structured over 1-3 years with specific EBITDA or revenue targets.

Option 4: The hybrid approach

For SBA deals, this typically means reducing the upfront price somewhat and adding a forgivable seller note for the remainder. Everyone gives a little, the deal gets done, and the seller has a path to their full proceeds through the refinance.

Setting Up the Seller Conversation

Before you pick up the phone, get your house in order:

1. Know your numbers cold. What exactly does the QofE show? What will the lender actually approve? Have the specifics ready.

2. Map out your restructuring options. Don't come with just problems. Come with two or three specific solutions you can propose.

3. Understand the seller's priorities. Do they need maximum cash at closing? Or do they care more about total proceeds even if timing shifts?

4. Be ready to walk. If the gap is too wide or the seller won't engage, you need to know your limit.

Framing matters enormously here. This conversation is not "your business isn't worth what you said." This conversation is "here's what financing markets will support based on current performance."

Position it as market reality, not a negotiating tactic. Because that's what it is.

Having the Actual Conversation

Lead with your continued commitment to the deal. Present the QofE findings factually, without emotion. Explain the financing constraint in plain terms. And introduce the restructuring as a solution you've already thought through.

You'll likely get pushback. If the seller says the business is worth what you agreed, don't argue valuation. Acknowledge their perspective, then redirect to what financing markets will support today. If they accuse you of re-trading, stay calm and point to the third-party diligence you paid for because you wanted to close this deal.

If they threaten to find another buyer, give them space. But gently remind them that a new buyer will run their own QofE and likely find the same thing.

The goal is collaborative problem-solving, not confrontation.

When to Walk Away

Sometimes the deal isn't salvageable. Red flags include:

• The performance decline reflects a fundamental business problem, not just timing

• The seller refuses any flexibility despite clear evidence

• The gap is so large that restructured economics don't work

• Your diligence uncovered issues beyond just the earnings drop

Sunk costs are real, but they're sunk. A bad deal doesn't become good just because you've invested time and money. Walking away is sometimes the right answer.

Deals Get Done in the Gray Area

Most acquisitions hit speed bumps. The QofE report is often where expectations meet reality.

The buyers who close deals aren't the ones who never face problems. They're the ones who restructure creatively and have honest conversations with sellers when problems arise.

Come to the table with solutions, not just problems. Show the seller a path to their goals, even if the timeline shifts. Keep the relationship intact throughout.

That's how deals get saved.

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