What is a Good DSCR When Buying a Business?

When you buy a business using debt financing, the business itself needs to generate enough earnings to repay the loan. The metric that measures this is the Debt Service Coverage Ratio (DSCR) — and it is the number your lender will scrutinise most closely.

What is DSCR?

DSCR is the ratio of annual earnings to annual loan repayments:

DSCR = Annual Earnings ÷ Annual Debt Service

Where Debt Service is the total principal and interest payment over a year, calculated using the PMT formula:

Annual Debt Service = PMT(interest_rate, loan_term_years, loan_amount)

Example: A business earns $150,000/year. You take an acquisition loan of $300,000 at 8.5% over 7 years. Annual repayment = $59,000. DSCR = 150,000 ÷ 59,000 = 2.54x.

What is a good DSCR?

DSCR benchmarks vary by industry. Most lenders require a minimum of 1.25x–1.5x, but industry-specific thresholds differ:

| Industry Type | Minimum DSCR | Why Higher/Lower | |--------------|-------------|-----------------| | Professional services (accounting, legal) | 1.3x | Stable, recurring revenue | | Healthcare (dental, medical) | 1.3x | Regulated, consistent demand | | Retail | 1.4–1.5x | Discretionary spending risk | | Food & hospitality | 1.5–1.6x | High fixed costs, volatile margins | | Laundromats | 1.2x | Very stable, asset-backed |

As a rule of thumb:

• ≥ 2.0x — Excellent. Comfortable buffer above repayments.
• 1.5x – 2.0x — Good. Manageable risk for most lenders.
• 1.25x – 1.5x — Borderline. Lender may require additional security.
• 1.0x – 1.25x — Tight. One bad year and the business can't service its debt.
• < 1.0x — Deal-breaker. The business cannot repay the loan from its own earnings.

The four variables that affect DSCR

1. Earnings

The higher the earnings, the higher the DSCR. This is why accurate earnings figures matter — inflated SDE or normalised EBITDA that doesn't hold post-acquisition will collapse your DSCR.

2. Loan amount (LTV)

A higher LTV means a larger loan and higher annual repayments. Most acquisition loans are structured at 60–70% LTV. Putting in more equity (lower LTV) directly improves DSCR.

If DSCR is too tight, increasing your equity contribution is often the fastest fix.

3. Interest rate

Current commercial acquisition loan rates typically range from 7.5–10% depending on the lender, security, and borrower profile. A higher rate increases annual debt service and reduces DSCR.

4. Loan term

A longer loan term reduces annual repayments (lower debt service) and improves DSCR. Most acquisition loans are 5–10 years. Extending the term from 7 to 10 years can meaningfully improve a tight DSCR.

How to calculate DSCR for any deal

1. Get the earnings figure (EBITDA or SDE from the IM)
2. Determine your loan amount: Asking Price × LTV
3. Calculate annual debt service: PMT(rate/1, term_years, loan_amount)
4. Divide: DSCR = Earnings ÷ Annual Debt Service

Or use the free BAS calculator — it calculates DSCR automatically using industry benchmark assumptions.

What to do when DSCR is too low

If DSCR falls below the minimum threshold, you have four levers:

1. Negotiate the price down — reduces loan amount and debt service
2. Increase your equity — reduces LTV, reduces annual repayments
3. Extend the loan term — reduces annual repayments (but increases total interest paid)
4. Walk away — sometimes the deal simply doesn't work at any reasonable structure

DSCR is not negotiable with lenders. It is a hard gate. If the business cannot service the debt, no amount of enthusiasm will change the numbers.

DSCR and the BAS Score

In BAS Tool, Financing Feasibility (based on DSCR) is weighted at 25% — the highest single weight in the composite score. This reflects how critical financing viability is to any acquisition.

A DSCR below the industry minimum triggers a red deal flag — the most serious warning the tool surfaces. It means the deal is financially unworkable at the stated price and default financing assumptions.

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Want to check the DSCR on a specific deal? Use the free BAS calculator — it calculates DSCR, scores financing feasibility, and surfaces deal flags automatically.