Business acquisition DSCR calculator
See whether the business’s cash flow covers the proposed acquisition debt after adjusting seller-reported earnings toward what a lender may actually underwrite.
The calculator
A worked example
A buyer acquires a business for $2,500,000. They contribute 20% in cash, the seller carries a $250,000 note at 6% over five years, and a bank lends the balance over ten years at 9%. The seller presents $700,000 of earnings.
| Buyer equity | $500,000 |
|---|---|
| Seller note | $250,000 |
| Senior bank loan | $1,750,000 |
| Annual senior debt service | $266,019 |
| Annual seller-note service | $57,998 |
| Total first-year debt service | $324,018 |
From the seller’s earnings to the lender’s
The figure a seller presents is not the figure a lender lends against. The gap between them is the single largest reason a deal that looks financed on a listing does not clear underwriting. The calculator makes each deduction explicit rather than asking for one number.
| Earnings as presented | $700,000 |
|---|---|
| Less add-backs the records do not support | $0 |
| Less a salary for whoever runs the business | −$150,000 |
| Less maintenance capital spending | −$30,000 |
| Cash flow for debt service | $520,000 |
The replacement salary is the deduction buyers miss most often. Seller’s discretionary earnings is stated before anybody is paid to run the business. If the buyer intends to run it themselves, the salary is still a real cost: it is the buyer’s own pay, and it cannot also service debt. What SDE includes, and what a lender removes.
How to read your result
The ratio is annual cash flow divided by annual debt service. A result of 1.50× means the business generates $1.50 of cash flow for every $1.00 of debt service under the assumptions you entered. A ratio alone does not mean a lender will approve the deal. Actual lender requirements vary by lender, program and transaction.
- Below 1.00×.Cash flow does not cover the proposed debt. The structure needs to change before a lender will look at it.
- 1.00× to 1.25×.Cash flow covers the debt with little margin. This sits under the 1.25× initial-acquisition benchmark under SOP 8.1, effective October 1, 2026. The coverage rules by transaction category.
- 1.25× and above.Meets the initial-acquisition ratio used in this model, not a loan approval. The conventional comparison uses 1.50×; actual lender requirements vary.
SOP 8.1 uses different coverage requirements for some transaction categories and provides specific treatment for qualifying owner-occupied special-purpose property. This calculator does not classify those transactions or decide which earnings a lender accepts. Read the coverage rules and exceptions.
Why the lender may use a different earnings number
Add-backs may be challenged, compensation may be adjusted, recurring capital needs may be considered and remaining debt still has to be serviced.The figure you enter is usually the seller’s presentation of earnings. The figure a lender uses is what remains after its own adjustments.
- Owner compensation is normalized to a market salary for the role you will fill.
- One-time items and personal expenses run through the business are removed.
- Rent is adjusted to market where the seller owns the building.
- A capital expenditure reserve is held back for equipment the business will need.
- Any debt the business carries after closing is counted against the same cash.
The calculator asks for four of those five directly: unsupported add-backs, a replacement salary, a capital spending allowance, and debt the business keeps after closing. Rent is the one it does not model, because it depends on a lease the buyer has not yet signed.
The rest of the deal
Coverage is one question. These answer the ones either side of it, and they share this page's arithmetic.
- Valuation and SDEWhat are the earnings, and what is the business worth on them?
- Seller financingWhat does a seller note actually cost, and what is owed at maturity?
- Capital stackHow does the whole purchase get funded?
What a lender does with this number
Three articles on how the ratio is read in underwriting, and what a seller can do to improve it before the deal reaches a lender.
- SBA Loan vs. Conventional Loan: Breaking It Down with a $5 Million ExampleCompare interest on two illustrative $5 million loans, then examine equity, fees, eligibility and rate assumptions before choosing acquisition financing.
- 10 Ways Sellers Can Make a Business Easier to FinanceTen ways sellers can prepare financial records, earnings adjustments, debt treatment and transition information for a buyer and lender financing review.
- Acquisition Financing Document Checklist: What Lenders Need and WhyPrepare buyer, business and transaction documents for acquisition financing. Understand what each supports, the SBA timing tests and private follow-up.
Go deeper on the arithmetic
The ratio is only as good as the earnings it divides. These cover what the coverage test measures, which earnings metric a deal is quoted in, and what a budget this result fits into.
- DSCR for Acquisition Loans: How Much Debt Can the Business Support?Learn how acquisition debt coverage works, which cash-flow adjustments matter, and how interest rates and seller payments change borrowing capacity.
- SDE vs EBITDA: One Business, Two NumbersSDE and EBITDA differ by one owner's pay. When each applies, how to convert between them, and why a multiple built on one cannot be applied to the other.
- How Much Business Can I Afford to Buy?Estimate an acquisition budget using available cash, project costs, debt capacity, and retained liquidity instead of a down-payment percentage alone.
Methodology and sources
The senior loan is the purchase price less your equity injection and less any seller note. Each tranche is built as a monthly schedule: nominal annual rate, monthly compounding, end-of-month payments. Coverage is cash flow for debt service divided by the payments due in that twelve-month window. Where a structure defers payments, the first year and the worst full year are reported separately, because a deferral holds the first year down and a single ratio hides it.
The default interest rate is the US bank prime loan rate of 7% plus 2 points, recorded on October 2, 2026 from the Federal Reserve H.15 selected interest rates. It is an illustrative assumption, not a quote or an offer. Actual pricing depends on the lender, the buyer and the target.
This calculator is an estimate for planning. It is not a credit decision, and it is not financial advice. To test a specific deal against live lender appetite, request a financing review or read what each financing route requires.
Questions about this calculator
What is a debt service coverage ratio?
It is the target’s annual cash flow divided by its annual debt service. A ratio of 1.50× means the business generates one and a half dollars of cash for every dollar of principal and interest it owes that year. Lenders use it to judge whether the acquired business can carry the loan that buys it.
Why is my lender’s DSCR lower than this calculator’s?
The lender may use different earnings adjustments, debt obligations or reporting periods. This model deducts the replacement salary, rejected add-backs and capital-spending allowance you enter. Compare those inputs with the lender’s definition before comparing the ratios; this calculator does not reproduce every lender’s underwriting.
Should a seller note be included in debt service?
Include scheduled seller-note payments when evaluating the cash needed for debt service. A full-standby period may have no current payments, but later payments and any balloon remain obligations. This calculator follows the payment terms entered; the lender determines the treatment required for its underwriting and any applicable program rules.
From preparation to a transaction
Take the model into a financing conversation
Have a deal in front of you?
Whether you have a signed LOI, are preparing an offer or are still evaluating the opportunity, send us the basic numbers and where you are in the process. We’ll look at the business, buyer and proposed structure and determine what the financing path may look like. No deal yet? Tell us what you are exploring, and we’ll show you the financing paths that may fit.