---
title: "Modeling debt coverage and cash-on-cash return, Financing Your Route Acquisition"
url: https://poolroutemarketplace.com/learn/financing-your-acquisition/debt-coverage-modeling
description: "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 bot"
lang: en
---

# Modeling debt coverage and cash-on-cash return

Lesson 3 of 8 · 10 min read

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.

## Quick check

\1. Lender minimum DSCR is typically:

\2. Why strip out seller's owner draw and replace with market comp?

\3. Working capital reserve at close should cover roughly:

\4. What does DSCR measure?

\5. Lender comfort threshold for DSCR on a small acquisition?

\6. What's a healthy cash-on-cash return target on a route acquisition?

\7. How conservative should you build the model?

\8. What kills DSCR fast?

\9. Lenders typically want a debt service coverage ratio (DSCR) of at least ____.

\10. DSCR over 2.0 means you're over-collateralized and should borrow more.

Earn 56 points

Mark this lesson complete

← Previous lesson: https://poolroutemarketplace.com/learn/financing-your-acquisition/seller-financing-strategy
Next lesson →: https://poolroutemarketplace.com/learn/financing-your-acquisition/lender-package

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