Two numbers decide whether an acquisition is a good buy at the proposed financing: DSCR (debt service coverage ratio) and cash-on-cash return. Build both before you sign an LOI.
DSCR = Annual Net Operating Cash Flow ÷ Annual Debt Service.
- Net operating cash flow ≈ Seller's Discretionary Earnings (SDE) − your replacement owner comp − new operating costs you'll add (insurance hike, software, payroll bump for a tech).
- Annual debt service = sum of all annual P&I across SBA, seller note, and any other financing.
- Lenders want ≥ 1.25x. You should personally want ≥ 1.5x for a margin of safety. Below 1.25x and a single bad month wipes you out.
Worked example, a $300,000 route:
- Trailing 12 months SDE: $120,000 (revenue $240k, all-in costs $120k).
- Replacement owner comp at $60k → adjusted operating cash flow ≈ $60,000/yr.
- Stack: $30k cash + $15k seller note (5%, standby 24 months) + $255k SBA 7(a) (prime + 2.75%, 10yr).
- Year-1 debt service ≈ $38,000 (SBA P&I, seller note deferred).
- DSCR year 1 ≈ $60,000 / $38,000 ≈ 1.58x. Solid.
- Cash-on-cash year 1 ≈ ($60,000 − $38,000) / $30,000 cash invested ≈ 73%.
Why "replacement owner comp" matters. If you don't pay yourself a market wage in the model, you're double-counting. SDE includes the seller's owner draw, strip it out and replace it with what you'd pay a hire to do that role (typically $55–75k for an owner-operator-tech in most markets).
Stress tests every model should include:
1. Churn shock: 15% of accounts cancel in first 90 days. Recalculate DSCR. Does it still clear 1.25x?
2. Interest rate up 200 bps: SBA loans are variable. Model rate at +2% to test resilience.
3. Insurance / fuel / chemical inflation 8%: not unrealistic in a year. Does the deal still cash-flow?
4. Owner illness for 30 days: who runs the route? Does the model assume a temp tech and the cost?
Cash-on-cash return answers: "for every dollar of MY money that closes the deal, what's the year-1 take-home?" It's a useful sanity check for whether the equity check makes sense versus alternatives (e.g., a different business, indexing, paying down personal debt).
The number nobody talks about: WORKING CAPITAL. Plan for 60–90 days of operating expenses ($15–30k for most routes) in cash on hand at close, separate from your equity injection. New owners who close with $0 in the operating account are one slow-paying month from a real problem.
Build this in a real spreadsheet, not a head calculation. We have a worksheet template in the Library you can start from. As always, this is educational content, not financial advice; have a CPA review your specific model.