Most small business acquisitions are bank-financed. Here is how lenders think about debt service coverage, and what it means for your sale price.
Your buyer probably needs a loan
For businesses in the $1M–$20M revenue range, the buyer is very often using an SBA 7(a) loan or conventional financing for part of the price. That means the lender, not just the buyer, has to believe in your numbers.
What DSCR is
Debt service coverage ratio compares the business's cash flow to the loan payments it would have to support. Lenders typically want comfortable coverage, commonly in the range of 1.15x to 1.25x or more depending on the lender and program. If the cash flow can't cover the new payment with room to spare, the loan gets smaller or declined.
Why it caps your price
Lenders size the loan on verifiable cash flow, not on what a seller hopes to get. A business that looks profitable but can't prove it, or whose earnings depend on the owner, supports less debt. Less debt available means a lower price the buyer can afford.
Other things lenders look at
Customer concentration, trends in revenue and profit, the quality of financial statements, the lease, and how much the business relies on the owner. Buyers typically also contribute a down payment, and sellers are often asked to carry a portion of the price as a note.
What to do about it
Make the financials clean and consistent, document add-backs, reduce owner dependence and concentration, and check your lease. The goal is for a lender to be able to confirm your earnings quickly and without surprises.
This article covers general lending and deal practices and is not legal, tax or financial advice, or a guarantee of loan approval or terms for any specific business. Lender criteria vary, so talk to your CPA, attorney and lender about your situation.