DSCR is a screening relationship, not a universal approval rule. Different lenders define cash available for debt service differently and may include existing obligations, taxes, owner compensation, capital expenditure or other adjustments.
DSCR = cash available for debt service ÷ required annual principal and interest
Buyer-operator example
| Normalized SDE | $260,000 |
| Buyer compensation requirement | − $90,000 |
| Recurring capital expenditure | − $20,000 |
| Operating reserve | − $15,000 |
| Cash available for debt service | $135,000 |
| Annual debt service | $95,000 |
| Planning DSCR | 1.42x |
This model treats $90,000 as compensation for the buyer's labour before measuring the return available to service acquisition debt.
Replacement-manager example
If the buyer will not operate the company, replace the buyer compensation assumption with the fully loaded market cost of the seller's duties. Suppose a manager and retained sales responsibility cost $125,000 rather than $90,000. Cash available for debt service falls to $100,000 and DSCR falls to 1.05x. The same debt that looked plausible for an owner-operator becomes fragile for an investor.
Common DSCR mistakes
- Using seller-presented SDE without validating add-backs.
- Ignoring the owner's labour because it is not labelled payroll.
- Excluding recurring equipment replacement and working-capital needs.
- Using the initial interest rate without a higher-rate scenario.
- Counting hoped-for automation savings before implementation.
- Testing annual totals while ignoring seasonal cash shortages.
Reverse the equation
If sustainable cash available for debt service is $135,000 and your planning minimum is 1.35x, annual debt service should not exceed $100,000. Convert that payment into a loan amount using the actual proposed term and rate, then add the equity you can invest without exhausting reserves.
Compare coverage scenarios
Use the AndChill deal calculator to test debt payments and operator assumptions.
Sources and methodology
Pressure-test the debt before the offer.
Bring the recast, proposed financing and intended owner role. We will map the assumptions that move coverage.
Book a free call →Educational information only. Lender definitions, underwriting requirements, rates and terms vary. Obtain financing, accounting and legal advice.