A lender is not really asking whether a projection is optimistic. It is asking whether the historical numbers behind it already hold up — because a forecast built on shaky history rarely survives its own diligence.
Key takeaways
A buyer who assumes a credible projection means a conservative growth rate has the wrong end of the problem. A lender reading a forecast is testing whether the earnings base it starts from is real, whether the assumptions on top of it are defensible, and whether the resulting number clears a coverage test — optimism about next year’s revenue is a much smaller part of the picture than most first-time buyers expect.
Deavo’s own diligence checklist sequences the work deliberately: financial diligence first, because “if the underlying numbers do not hold up, there is little reason to spend time and legal fees on the operational and legal review that follows.” (deavo.ai/insights/due-diligence-checklist-first-time-buyers) That sequencing is exactly how a lender reads a projection too: two to three years of historical financials plus current-year interim figures, checked against the business’s own tax and GST/HST filings, come before the forward-looking numbers get any real credit. A forecast presented without that historical grounding — or worse, one where the historical figures do not tie to what was filed with CRA — is unlikely to get past a lender’s first read, regardless of how conservative the growth assumptions look.
A projection almost always starts from a normalized earnings figure — SDE or EBITDA — built by adding back owner compensation, one-time items, and other discretionary expenses. Deavo’s own valuation editorial calls aggressive or unsupported add-backs “one of the more common points of pushback during due diligence.” (deavo.ai/insights/sde-vs-ebitda-which-valuation-method-fits-your-deal) A related article on reading financials lists the specific patterns that undermine an add-back’s credibility: owner perks run through the business, “one-time/non-recurring items such as a lawsuit settlement or a one-off equipment sale,” and related-party pricing “including rent paid to a property the owner also owns.” (deavo.ai/insights/reading-financial-statements-before-you-buy) Every add-back that cannot be tied to a specific, documented, non-recurring event is a number a skeptical lender will simply discount back out, which shrinks the earnings base the whole projection is built on.
A lender’s real bar is not qualitative — it is the same debt-service coverage ratio used at underwriting, roughly “≥ 1.25× on SDE” or “≥ 1.30× on EBITDA” on deavo’s published bands. (deavo.ai/financing) A projection that shows growing revenue but does not clear that coverage ratio, once realistic operating costs and debt service are applied, will not move a lender’s decision regardless of how the top line trends. Conversely, a flat or even modestly declining projection that still clears the coverage ratio comfortably, built on a defensible earnings base, is a stronger credibility signal than an aggressive growth story resting on unproven add-backs.
A subtler credibility problem shows up when a projection quietly shifts its own earnings basis partway through — historical years shown as SDE, projected years shown as EBITDA, with no owner-compensation adjustment bridging the two. Deavo’s own guidance is blunt that converting between SDE- and EBITDA-based figures “is imprecise and should be treated as directional only.” (deavo.ai/insights/sde-vs-ebitda-which-valuation-method-fits-your-deal) A lender reviewing a projection that switches basis unexplained partway through the forecast period will read it as either a mistake or an attempt to make the trend look stronger than the underlying numbers actually support — keeping the earnings basis consistent, or clearly labelling and explaining any switch, is a small discipline that protects the credibility of the whole document.
A buyer’s projection is one input among several a lender weighs, not the only one. On a bank-financed acquisition, the underwriting process typically includes “a review of the buyer’s personal financial position, the target business’s financial statements, and often a business valuation or appraisal the lender commissions independently.” (deavo.ai/insights/bank-loan-vs-vendor-financing-which-is-faster) An independently commissioned valuation is, in effect, the lender cross-checking the buyer’s own projection against a separate professional read on the business’s earnings and prospects. A projection that diverges sharply from what an independent appraiser concludes is likely to raise the same credibility questions as an unsupported add-back, even where every number in the buyer’s own file is technically defensible on its own terms.
A buyer submits a lender package for a $1,300,000 acquisition showing projected EBITDA of $340,000 in year one, built on the seller’s historical average of $290,000 plus $50,000 of assumed efficiency gains from combining two back-office roles. The lender’s underwriter strips the $50,000 efficiency assumption entirely, on the basis that it is a projected future saving rather than a documented historical figure, and re-runs the coverage test against the $290,000 baseline instead. At a proposed senior loan of $715,000 (55% of price), a 1.30× EBITDA target implies roughly $223,000 of required debt-service capacity ($290,000 ÷ 1.30 ≈ $223,000 of debt service the earnings must cover) — comfortably clear on the historical figure alone. Because the deal still works without the disputed efficiency assumption, the projection survives the lender’s scrutiny; had the loan been sized assuming the $50,000 saving materialized, the same review would likely have forced a renegotiation of the loan amount instead.
Related: preparing a lender package a bank will approve, chartered bank lending against cash flow, and deavo’s SDE versus EBITDA explainer.
Lenders typically start from the buyer’s submitted projection but rebuild the earnings base themselves, stripping out any add-back or assumption they cannot independently verify against historical financials and tax filings.
Deavo’s diligence checklist frames the historical baseline as two to three years plus current-year interim figures; a forward projection is generally most credible when it stays close to that same horizon rather than extending confidently many years out.
An add-back or assumption the lender cannot tie to documented, non-recurring history — deavo’s own editorial names this as the most common point of pushback in due diligence, and it undermines the lender’s trust in the rest of the file, not just the disputed line.
A short call is enough to pressure-test the add-backs before a lender does it for you.
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