1.25 DSCR - Does That Sound Right To Anyone?

October 08, 2021

by a searcher in Austin, TX, USA

I just had a conversation with a broker regarding a $600k SDE printing business with around 1mm in assets and he said that they sell businesses in that cash flow range with 1.25 DSCRs and 90% commercial financing all the time. Does that sound really aggressive to anyone else?

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Reply by a searcher
from Duke University in Tulsa, OK, USA

Yes it is aggressive. My understanding is that 1.25 DSCR is about the minimum most banks will allow. I've seen brokers suggest low owner salaries of 60K to 80K annually and a DSCR of 1.2 or 1.3 in order to push the valuation multiple up. Every deal I look at I insist on a fair market owner salary (consistent with what I can get in a corporate role), a reasonable budget for capital replacement and improvements such as replacing equipment at the end of its service life, and a DSCR of at least 1.5. After I evaluate with these changes the valuation moves closer to a reasonable valuation of 2-3 SDE or 4 times EBITDA. In this case the broker is suggesting the low DSCR because he knows the banks will approve it and the banks know if you default it is the taxpayers problem on a SBA loan and not theirs.

Reply by a searcher
from University of Virginia in New York, NY, USA

Those are Min (DSCR) and Max (leverage) of SBa 7(a) program. Doesn’t mean that banks will get that aggressive. You are unlikely to get a bank that pushes both to the limit unless a unique situation (guaranteed pipeline / contracts). 0% chance any non-SBA lender gets that aggressive.

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