When your buyer says they’re financing the purchase through an SBA loan, a significant third party enters the conversation: the lender’s underwriting team. Underwriting is the process by which a bank evaluates a loan application and decides whether to approve it, at what amount, and on what terms. Understanding what underwriters look for in a childcare acquisition helps you prepare documentation that accelerates approval — and avoids surprises that delay or derail the deal.
Why Underwriting Matters to You as the Seller
Your buyer may love your school and want to purchase it at your asking price. But if their lender doesn’t approve the financing, the deal doesn’t close. Most childcare acquisitions are contingent on SBA loan approval — which means the lender’s underwriting decision is effectively a co-decision-maker in your sale. Being prepared with clean, organized documentation that answers the lender’s questions before they ask them is one of the most practical things you can do to protect your deal.
The Five Things SBA Lenders Evaluate in a Childcare Acquisition
1. Debt Service Coverage Ratio (DSCR)
The most important calculation in lender underwriting. DSCR = annual SDE (or EBITDA) divided by annual loan payment amount. Lenders want to see at least 1.25 — meaning for every $1.00 in debt service, the business generates $1.25 in earnings.
Example: A school with $200,000 SDE purchased for $600,000 with 10% down. SBA loan: $540,000 at 8% over 10 years = approximately $78,600/year in payments. DSCR = $200,000 / $78,600 = 2.54 — well above the minimum. If SDE were only $110,000, DSCR drops to 1.40 — still passing, but lenders scrutinize borderline DSCRs carefully and may require additional collateral or a larger down payment.
2. Collateral
SBA lenders require collateral to secure the loan. For business-only acquisitions, this is typically the business assets being purchased (FF&E, goodwill). If the loan exceeds the value of business assets, lenders may also require the buyer to pledge personal assets — home equity, investment accounts. Sellers don’t directly control collateral requirements, but knowing the loan is adequately collateralized helps a deal close without last-minute complications.
3. Lease Documentation
Lenders verify that the lease can be assigned to the buyer, that remaining term is adequate to cover the loan period, and ideally that an SNDA is available. A lease with inadequate term or unclear assignment language is a common underwriting hold-up. Addressing your lease before listing removes this risk entirely.
4. Licensing Status
Lenders require verification that the business holds a current, valid state childcare license with no unresolved violations or pending enforcement actions. A clear licensing record speeds underwriting; issues slow or stop it.
5. Business and Personal Tax Returns
For SBA loans, underwriters review both the business’s three most recent tax returns and the buyer’s personal returns. Tax returns that don’t align with P&L statements — or that show declining income trends — trigger additional questions and slower approval. Clean, consistent tax records are essential.
How Long Does Underwriting Take?
SBA loan underwriting for a childcare acquisition typically takes 30–60 days once a complete loan package is submitted. Incomplete documentation, missing records, or issues requiring additional explanation can extend this timeline significantly. Many deals that “collapse during due diligence” actually collapse because the loan package never cleared underwriting — and the buyer eventually walked away.
What You Can Do to Support Underwriting
- Have three years of tax returns organized and ready to produce immediately.
- Make sure your P&L for each year reconciles to your tax return. Have written explanations ready for any differences.
- Review your lease and ensure it’s assignable with adequate remaining term before any buyer is involved.
- Verify your licensing status and resolve any open items before listing.
- Prepare a normalized SDE statement that clearly shows add-backs and how they were calculated — don’t make the lender derive this themselves.
What This Means for You
The lender is your silent partner in any financed transaction. Sellers who understand what underwriters need — and present their documentation accordingly — close more deals that would otherwise fall apart due to lender uncertainty. Think of your due diligence package as a loan package, not just a seller’s disclosure. Preparing it with the lender’s underwriting criteria in mind is one of the most practical things you can do to protect your deal.
