DSCR Calculation - SDE or EBITDA?

October 15, 2024

by a searcher from University of California, Los Angeles in Orange County, CA, USA

Do SBA lenders typically calculate DSCR using SDE (net income + officer salaries + reasonable addbacks)? Or do they use EBITDA? I've heard that they'll use one of those numbers and then substract a salary value (say $100k) to account for the new owner's salary. If that is the case, what is that adjusted salary value?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

In general just about all of the SBA lenders use adjusted EBITDA. They will take EBITDA and add back owner's salaries and any reasonable and verifiable owner expenses that will go away (like life insurance, health insurance, auto leases, retirement benefits, etc.), add-back any family member salaries that are not involved if there are any, add-back any other one-time expenses if there are any, and remove any required adjustments for future CAPEX needs. They will also remove a salary for the new owner. The SBA does not have a specific formula the Bank's must use for how to calculate the new buyer's salary, so they all have slightly different ways to do. Some have minimums they use. Other's calculate it purely based on what is needed to pay personal expenses and to cover living expenses.

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Reply by a lender
in Stuart, FL, USA

There is no "one size fits all" approach to this. Every deal is different, and every lender is different. If you do not understand how your lender is calculating cash flow (SDE, adjusted EBITDA, or going off the M1), you better ask them. Not every lender calculates officer comp back the same way and it also depends on what is going on with the buyer(s) and his/her/their needs. Are there affiliate businesses? How are those being calculated. If you are not making adjustments for every deal you are considering, you are setting yourself up for failure.

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