Should you buy a business with declining revenue?

Why is a declining business harder to buy?

Three rules work against you.

• Coverage is measured on history. Under SBA SOP 50 10 8.1, cash flow must cover debt at 1.25x for an initial acquisition, using the last fiscal year or the average of the last two. Projections cannot be used to meet the test.
• The average can mislead in both directions. When earnings are falling, a two-year average is higher than the current run rate. A lender may approve a loan your current earnings barely support.
• The valuation caps the debt. Every change-of-ownership loan needs an independent valuation. Total debt is capped at the appraised value. If the appraiser weighs the decline, any gap between price and value must come from your cash.

The seller will usually want a price based on the better years. You need a price based on the year you are buying.

When is a decline an opportunity?

When the cause sits with the owner, not the market. The IBBA's Q2 2026 survey found retirement was the top reason owners sell, cited by 45% of sellers under $500,000 and up to 72% in $1 million to $2 million deals. Owners preparing to retire often stop doing the things that grow a business.

Signs that the decline is owner-driven and fixable:

• Existing customers are staying, but new customer revenue has fallen. Marketing or sales effort stopped.
• Prices have not been raised in years while costs rose.
• The owner reduced hours or closed on days that used to be busy.
• Equipment is idle or capacity is unused, and demand in the area looks steady.
• Competitors in the same market are growing.

Check the last one carefully. If local competitors are also shrinking, the problem is the market.

When should you walk away?

• The market is shrinking. Demand is moving to a different technology, channel or location.
• A key customer, contract or license was lost. The revenue is gone and not coming back with effort.
• Key employees have left. The capability that produced the revenue left with them.
• Margins are falling faster than revenue. A competitor is taking price, or costs are out of control.
• The decline is accelerating. Each quarter is worse than the last.
• Nobody can explain it. An unexplained decline is the worst kind, because you cannot know when it stops.

How should you price a business with falling earnings?

Price on trailing twelve months, and check that a further decline would not sink you. The figures below are illustrative, except the multiple and the rate.

Seller's discretionary earnings (SDE) were $520,000 in 2023, $460,000 in 2024 and $400,000 in 2025. The last twelve months run at $360,000. Both sides use 2.7x, the BizBuySell Q1 2026 average. You take a $120,000 salary, and fees and working capital add $80,000.

1. The seller prices on the two-year average of $430,000: 2.7 times $430,000 = about $1.16 million.
2. You price on trailing earnings of $360,000: 2.7 times $360,000 = $972,000.
3. At the seller's price, the SBA loan is about $1.12 million and the annual payment at 10% over 10 years is about $177,100. Coverage on the lender's two-year average after your salary ($310,000) is 1.75x. Coverage on trailing earnings ($240,000) is 1.36x.
4. If earnings fall another $60,000 next year, coverage at the seller's price drops to about 1.02x. You would struggle to make payments.
5. At your price, the loan is about $947,000 and the payment about $150,100. Trailing coverage is 1.60x. After a further $60,000 drop, it is 1.20x. Tight, but payments are still covered.

Even at your price, the deal only works if the decline stops. Buy it only if you have a specific plan for why it will.

How can the structure share the risk?

• A seller note that is not on full standby. It counts in coverage at a maximum 10-year amortization, but the seller is paid only if the business keeps paying. That aligns the seller with stopping the decline.
• A longer transition. SBA rules allow the seller to stay up to 24 months as a consultant or employee.
• No earnouts on SBA deals. SBA rules prohibit seller earnouts. In non-SBA deals, an earnout can bridge the gap, but SRS Acquiom data shows only 63% pay in full.

Where these numbers come from: SBA coverage, valuation, seller-note, transition and earnout rules from this guide to SBA SOP 50 10 8.1 and Cantrell Firm. Seller motives from the IBBA Market Pulse Q2 2026. The 2.7x multiple from Beancount's guide to BizBuySell data. Rate cap from NerdWallet; check current prime. Earnout data from Livmo, citing SRS Acquiom. SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026; lender practice under it is still settling and these are secondary summaries, so confirm current terms with your SBA lender.

Related questions

Should I use a lower multiple for a declining business?

Often, yes. A multiple prices in expected future earnings, and a business that is shrinking deserves less than an average one. Applying an average multiple to trailing earnings is the least you should ask for.

Will the lender approve a declining business?

It can, if historical coverage passes and the valuation supports the price. Expect more questions about the cause and your plan.

How long should the decline have lasted before I worry?

One weak year with a clear cause is different from three years of steady decline. Look at monthly numbers, not just annual totals, to see the direction.

What comes next

Sellers of declining businesses sometimes explain the gap with cash that never reached the books. The next question is how to value a business with unreported cash income. The buyers who end up with the most valuable companies decide what the business goes into before they buy it, and a fixable decline is easier to fix inside a company that already has the sales and systems it lacks.

Related articles

• What are the red flags when buying a business?
• When should you renegotiate and when should you walk away?
• Why would anyone sell a profitable business?
• How much will a bank lend to buy a business?
• How do you tell a good deal from a bad deal?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.