Key Insight
DSCR is the number that decides whether your deal gets funded. A business that looks great on paper can fail DSCR underwriting if SDE doesn't exceed debt payments by a sufficient margin.
The Formula
DSCR = Net Operating Income ÷ Total Annual Debt Service
For SBA acquisition lending, lenders typically define NOI as SDE minus market-rate management replacement compensation. Total debt service includes the new acquisition loan payment plus any existing debt the business carries post-close.
A DSCR of 1.0x means income exactly covers debt — no cushion. A 1.25x DSCR means income is 25% above the debt payment — the minimum most SBA lenders require. Many prefer 1.35x or higher.
Why 1.25x Is the Floor
The SBA's standard debt service coverage requirement is 1.25x global DSCR. "Global" means the analysis includes the buyer's personal debts (mortgage, car payments, other obligations) alongside the business debt. A business that passes on its own may fail global DSCR if the buyer has significant personal liabilities.
The Management Replacement Problem
The most common DSCR failure mode: a business with strong SDE that can't pass underwriting because the owner's salary is $80K but a replacement manager costs $150K. The net cash flow available to service debt shrinks by $70K — and what looked like a $300K SDE deal becomes a $230K NOI deal that may not cover the debt.
Business SDE: $280,000. Market-rate manager: $110,000. NOI: $170,000. Annual SBA loan payment on $900K at 9% over 10 years: ~$137,000. DSCR: $170,000 ÷ $137,000 = 1.24x — just below most lenders' minimums. The deal doesn't fund as structured. Options: lower the purchase price, increase equity injection, or find additional SDE documentation.
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