Glossary
Debt service coverage ratio (DSCR)
Debt service coverage ratio is the cash a business has available to pay debt, divided by its annual debt payments (principal plus interest). A DSCR of 1.25× means the business produces $1.25 for every $1.00 of debt payments.
Arcane estimates cash available as SDE less owner or manager compensation and a capital expenditure reserve. A lender's calculation is different: SBA SOP 50 10 8.1, Appendix 15, defines historical coverage using EBITDA and combined post-transaction debt payments, with documented adjustments where allowed. The minimum is 1.25× for initial acquisitions, owner buyouts and ESOP/cooperative transactions, or 1.15× for qualifying business expansions. Lenders may require more.
The trap: calculating coverage without paying the owner. A deal that only covers its debt if you work for free will not be financed, and should not be bought.