Experience Operating with Low DSCR

August 29, 2023

by an investor from Worcester Polytechnic Institute in Atlanta, GA, USA

Wondering if anyone can comment on their experience with purchasing businesses at <1.5 DSCR. I am looking at a recurring revenue, recession resistant business for 3.7x SDE. The business has consistent revenue and EBITDA for 2022 & 2023. DSCR is 1.3 at 2022 cash flow and 1.0 at 2021 cash flow. The business is in a niche with the ability to grow., but it's a small business with <$500K SDE

Lenders have given it the green light, but it gives me some pause on the DSCR being that low.

Has anyone on here bought and operated a business around those terms? Was it constant stress?

Reply by a searcher
from Texas A&M University in Johnson City, TN, USA

DSCR 1.0 vs 2021 historical?! What about 2019, 2020? Sounds to me like peak price on TTM, and risky when looking back further? Do you have term sheet from bank? If not, they may be dragging you along. If you're approved without one of the top lenders active here, then maybe deal is OK.

"Recession resistant" won't save you from the risks others mentioned.

I suggest you think in EBITDA multiples only, forget "SDE". 3 to 4x EBITDA with reasonable adjustments. No more. Only more in much larger deals with lots of seller roll.

Reply by a searcher
from The University of Chicago in Woodinville, WA, USA

You are overpaying for the amount of risk you are internalizing. I would recommend staying at >2 DSCR. If a few key employees or customers leave you will never recover. To the above points, unless you know the industry well or see great opportunities where you can 2x the revenue in the next 6-12 months realize you are just increasing your probability of losing everything you put in. At the very least, get ready to not sleep the next 12 months knowing that there will be a personal guarantee that you will be responsible for.

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