Diligence has a reputation for being adversarial. It shouldn't. Here's what we're actually looking at — and what matters most.
Most operators who call us have been through a lender's diligence process at least once. They know what it feels like to hand over three years of tax returns and wait while someone on the other end decides whether their business is good enough.
That's not how we think about this.
When we're evaluating a sale-leaseback, we're not looking for reasons to say no. We're looking for enough information to say yes with confidence — because a yes that falls apart in year three is worse for everyone than a no in week one.
Here's what we actually look at, in the order it matters.
1. Rent coverage — the number everything else orbits
Before anything else, we want to know whether the business can sustain the rent obligation over the life of the lease.
We calculate rent coverage by taking the unit-level EBITDA — the store's earnings before interest, taxes, depreciation, and amortization — and dividing it by the annual rent that would be owed under the proposed lease. A business earning $600,000 at the unit level paying $280,000 in annual rent has a 2.1x coverage ratio.
Our default floor is 2x for most business categories. Restaurant and QSR operations run thinner margins, so we start at 1.5x there. Industrial and distribution businesses tend to have more predictable cash flows but also carry more asset-specific re-leasing risk, so we want to see 3x-plus in those categories.
A deal can clear every other hurdle and still not work if the rent coverage isn't there. The rent is a fixed obligation that runs for 20 years. The business's ability to sustain it in a down year matters more than its performance in its best year.
What we want to see: trailing 12-month store-level P&L, ideally with monthly detail. Three years of data if available. The detail lets us look at seasonality, one-time items, and trend direction — not just the annual summary.
2. EBITDA stability — the trend is the story
Rent coverage tells us about the current picture. EBITDA stability over three years tells us whether that picture is likely to hold.
A business running 2.3x coverage today with a three-year trend of improving margins is a different credit story than a business running 2.3x coverage today that ran 3.1x three years ago. The same coverage number; different trajectories.
We want to see stability, not perfection. Every business has years that are better or worse. What we're looking for is whether the directional trend is positive — or at least flat — and whether we understand the reasons for any volatility.
What we want to see: three-year P&L at the unit level. If there's an outlier year (a COVID year, a remodel year, a transition year), tell us about it. Context makes the numbers make sense. Silence on an outlier makes us look for the explanation ourselves, which takes longer and creates more questions.
3. Growth trajectory — where you're going
We're not just underwriting the business as it exists today. We're underwriting a 20-year relationship with an operator who has a plan.
An operator with four locations who's opening two more has a different risk profile than an operator with four locations who's been at four locations for five years. Both can be good deals. They're not the same deal.
We want to understand your growth thesis — where new locations will be, what the market looks like, how the franchise system is performing in your geography. We don't need a five-year financial model. We need to understand whether the story behind your growth is coherent.
What we want to see: your current unit count and the locations you're targeting. If you're brand-new to this market, help us understand your read on the opportunity.
4. Real estate quality — not just square footage
The operator's credit is the primary underwriting story. The real estate is secondary. But it's not irrelevant.
We want to know whether the properties being sold are mission-critical — whether the operator needs to be in that specific location, or whether the location is convenient but replaceable. We want to understand the age and condition of the buildings. We want to know what the deferred maintenance picture looks like, because we'd rather price it correctly upfront than discover it in diligence.
A building with a mold-contaminated HVAC system and $195,000 in replacement cost isn't a deal-killer if we know about it early. It changes the purchase price or the rent structure. If we find it in week four of diligence, it changes the conversation in a worse way.
Tell us what's wrong with the building. We'll account for it. What we can't account for is what we don't know.
What we want to see: property addresses, rough square footage, age of the buildings, and anything notable about the physical condition. A phase one environmental summary if you have one. We'll commission our own anyway, but knowing what yours shows helps us sequence the work.
5. The story behind the numbers
This one doesn't show up on a spreadsheet. But it's often the most important part of what we're evaluating.
Every set of financials is an argument. The question is whether the argument makes sense. And the best way to assess that is to understand the operator's own read on what's in the numbers.
What happened in year two when EBITDA dipped 15%? Why are margins better in locations three and four than in location one? What's your view on the category's next three years?
The operators who can answer these questions clearly — who understand their own unit economics well enough to explain the variance — are the operators we want to work with for 20 years. The ones who say "the accountant handles that" are telling us something we need to understand before we proceed.
The disqualifiers — when we walk early
Part of doing this honestly is being clear about what doesn't work.
We walk when we see EBITDA in consistent three-year decline. Not a bad year — a directional trend that shows the business model is under structural pressure. A 20-year lease on a declining business is a bad outcome for the operator, not just the investor.
We walk when the coverage ratio is below floor and there's no enhancement — corporate guarantee, letter of credit, additional collateral — that adjusts the risk profile.
We walk when the underlying business is too concentrated in one location. An eight-store portfolio where one flagship generates 60% of the EBITDA is a single-location credit risk with seven supporting addresses. The math is different from what it looks like on the surface.
We also walk when the operator isn't confident in their own numbers. It's not a disqualifier to not know the answer to every question. It is a disqualifier if basic unit economics are unclear to the operator who runs the business.
A deal that didn't make it
We looked at a deal last year — five locations, strong aggregate EBITDA, 2.2x average coverage. Looked clean on the summary.
When we got into the unit detail, we found that one location — the original flagship, the one with the best real estate — was running significantly below the others. Not in decline, but structurally thinner margins because of a lease structure that predated the sale-leaseback interest by several years. The rent the operator would have paid us under the SLB was higher than what that location could comfortably carry on its own coverage.
We told the operator in week two. We weren't going to get 20 years into a deal that was structurally misfit from day one. It wasn't a verdict on the business — four of the five locations were strong. It was a structural mismatch we couldn't paper over.
The operator appreciated the directness. We stayed in touch. The right deal may exist when that flagship location turns over and the economics reset.
What good diligence feels like
The operators we've closed with — the ones we're in 20-year leases with — describe the diligence process as more straightforward than they expected.
That's usually because they came in prepared. Three years of unit-level P&L. A clear explanation of their growth thesis. An honest read on the physical condition of their buildings.
We ask a lot of questions. But none of them should be surprising if you know your own business. And if you don't know the answer to something we ask, telling us you'll find out is always the right response.
The goal of diligence isn't to catch anyone doing something wrong. It's to build enough shared understanding of the business that a 20-year lease is the beginning of a productive relationship, not a contract that creates problems for both sides in year seven.
Have questions about your own financial picture and how it would look to a capital partner? We're happy to take a look before you're officially in a process. Sometimes the answer is "here's what you should work on for 12 months before you call us." That's a useful conversation too.