What 20 IT MSP deals taught me about SBA DSCR (the number most buyers get wrong)

April 16, 2026

by a searcher from Columbia University - Columbia Business School in New Jersey, USA

DSCR is the number that decides whether your deal gets financed. SBA requires 1.25× minimum. Most buyers know that. What most buyers miss is what actually goes into the calculation. DSCR = CFADS ÷ Annual Debt Service CFADS is not EBITDA. It's cash flow available for debt service, which means: → Adjusted EBITDA minus a market-rate salary for whoever runs the business after you → Minus estimated taxes (21–25%) → Minus working capital buffer and maintenance capex Here's where most models go wrong. On a $3M IT MSP with $900K broker-adjusted EBITDA: Broker's replacement salary assumption: $80–100K (what's in the CIM) Real market-rate GM for a $3M MSP: $150–160K That's a $60–70K gap nobody talks about on the intro call. Run it correctly: $900K adj. EBITDA Less real GM salary ($160K): $740K Less 21% taxes: $585K CFADS Debt service on a $2.55M SBA loan at current rates (~11%) over 10 years: ~$422K annually DSCR: 585 ÷ 422 = 1.39× passes, but with a meaningful cushion only if your GM assumption is right. Now model it with the broker's $90K GM assumption instead: $900K − $90K = $810K, less taxes = $640K CFADS DSCR: 640 ÷ 422 = 1.52× looks great on paper You go to underwriting with 1.52×. Lender uses 1.39×. Deal either gets repriced or dies at the desk. Brokers model this using the most favorable replacement assumption they can justify. Lenders model it at the market rate. The gap is where deals die. Model DSCR with your real GM assumption before you spend a dollar on diligence. Takes 20 minutes. Saves you 4 months on deals that were never going to fund at the broker's number.

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

Thank you for sharing. I would concur with you that there are adjustments that need to be made to cash flow that often do not show up in the CIM or models. However, I do want to provide a few clarifications to your analysis: 1. The minimum DSCR required by the SBA is actually 1.15x. However, most lenders prefer to be at a minimum of 1.25x to 1.35x based on their internal policies, and some start even higher than that. 2. Most SBA lenders will not deduct income taxes from EBITDA unless the business is a C-Corp. As an S-Corp, Partnership, or LLC, taxes are paid on the personal level. Lenders will want the salary draw for the owner to be sufficient to cover personal living expenses, housing expenses, incomes taxes, and personal debts. So the taxes gets covered out of the draw. If anticipated taxes are high, that could impact cash flow because a higher owner draw would be needed. However, depending on your personal tax rates, it could be lower. But it is not a separate direct deduction from EBITDA unless you have a C-Corp where they will need to adjust for the taxes to be paid at that level. 3. I always recommend adjusting to an owner's fair market salary. If you are buying a business you should be able to earn a fair salary for running that business, or have the capacity to pay a fair salary for someone else to run that business for you. However, as stated above, lenders will adjust cash flow based on what you need to cover personal expenses, etc. If you can get away with a lower required salary, that can help cash flow for qualifying. It doesn't mean you are necessarily getting a good deal on the business, but a lower required draw does help the DSCR. 4. A working capital buffer does not have anything to do with DSCR directly. However, if you need to build working capital into the loan, then you would have a higher debt service you would need to have supported by cash flow. But lenders do not adjust cash flow for working capital directly. 5. Depending on what type of on-going CAPEX needs a business has, the lender will typically add back historical depreciation and then adjust for future CAPEX needs. Many businesses have light future CAPEX needs, so there may be no adjustment that needs to be made at all. However, if the business is equipment heavy, then it is likely the lender will want to factor in a reasonable adjust for future CAPEX needs. This is typically something you and the seller can have input on and negotiate with the lender on what the right number should be. Hopefully the above information provides some additional clarification. We offer a free analysis of deals you are looking at and can help clients figure out what the true DSCR is on their deals and what add-backs lenders will and will not use. Please let us know if we can ever be of any assistance with that. You can reach me here or directly at redacted

Reply by a searcher
from Columbia University in New Jersey, USA

Brad, really appreciate you taking the time to write this out. A few reactions: On the 1.15× floor - you're right technically, that's the SBA minimum. In practice, every lender I've talked to is underwriting to 1.25× or higher, so that's the number I model to, and I'm more comfortable servicing the debt as a buyer. If the lender is comfortable at 1.20×, great, more room to work with. On taxes - fair distinction for S-Corps and pass-throughs. The way I've been thinking about it is that the owner's draw needs to cover salary plus personal tax liability, so the effective cash leaving the business is higher than just a market-rate salary. The mechanics are different from a C-Corp, but the cash impact is real. Worth modeling both ways, depending on the entity structure. On WC - you're right that lenders don't deduct it from CFADS directly. I was including it as part of a buyer's true cost picture, not as a DSCR input. Could have been clearer on that. The core point I was making is that the replacement salary assumption is where broker models and lender models diverge the most, and I think we agree on. Your point #3 confirms it: if you can get away with a lower required draw, it helps. The problem is that most brokers assume you can get away with a much lower draw than is realistic. Thanks for the offer on the free analysis - I'll send you a deal sometime.

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