Inconsistent Financial Trends

Lenders prefer what Heather calls a steady Eddy business, which features consistent margins and predictable growth rather than erratic financial performance. Inconsistent trends are a major red flag because banks want to see a pattern that they believe will continue. One key metric to watch is the adjusted net margin after add backs; if this percentage fluctuates wildly, it suggests the seller’s add backs may not be legitimate. To mitigate these risks, you must dig into the bookkeeping or conduct a full Quality of Earnings report to normalize the data. Heather explains that you should think like a lender by setting your loan amount based on the business’s worst performing period rather than its best. This ensures the company can still hit a minimum debt coverage ratio of 1.3 even during a low cycle, protecting both you and the bank from potential default.