The 3 Numbers That Kill SBA Deals Before They Start

There are exactly three numbers that determine whether your SBA deal closes or dies. Most buyers only know about one of them. And the one they know? They calculate it wrong.

Most buyers learn how to size a deal. How to work backward from their liquidity to figure out what they can afford. That is step one. This is the next step.

Because "affordable" and "fundable" are two completely different things.

You can have the right liquidity. Find a business at the right price. Stack the capital the right way. And still get declined.

The reason is these three numbers. They live on the lender's side, not yours. If you do not run them before sending an LOI, you are wasting everyone's time.

The Gap Between Affordable and Fundable

Deal sizing is a buyer-side question. It answers "how big a deal can my balance sheet support?"

These three numbers are lender-side calculations. They answer a different question. "Will this specific deal actually get funded?"

We run a valuation model on every deal before it gets to LOI stage. We start with a standard 70/30 split. Seventy percent SBA, thirty percent seller finance. Then we adjust based on what the CIM shows.

Three numbers come out of that model. If any one of them fails, the deal is dead. No matter how good it looks on paper.

Number One: DSCR

DSCR. Debt service coverage ratio. The ratio of the business's cash flow to its total annual debt service.

Think about it from the lender's side. They are handing over close to a million dollars. Their only question is whether the business throws off enough cash to pay them back. DSCR answers that question with a single number.

A DSCR of 1.0x means the business makes exactly enough to cover its loan payments. Nothing left over. Nothing for you. That is a dead deal.

Lenders want at least 1.25x. We target 2.0x for comfort. We will consider 1.5x if the buyer brings clear synergies or operational improvements.

Here is the calculation. Take SDE, which is seller's discretionary earnings, the total cash the business generates for the owner before their salary. Subtract a reasonable owner's salary replacement. Divide what remains by annual SBA loan payments.

The number you get tells you how many times over the business can cover its debt.

On a million-dollar deal, the SBA loan is about $891,000. Monthly payments at current rates run $11,000 to $12,000. That is roughly $138,000 a year in debt service.

If SDE is $300,000 and you pay yourself $100,000, you have $200,000 left. Divide by $138,000. Your DSCR is about 1.45x. Tight, but workable.

Now drop SDE to $250,000. Same salary. You have $150,000 left. DSCR falls to 1.09x. The deal is dead before the LOI goes out.

This is where buyers get burned. They see a business with attractive revenue and a clean CIM. They run the sizing math. They never check whether the cash flow supports the debt at the asking price.

Number Two: Total Funded Debt to EBITDA

This is the ratio most buyers have never heard of. And it kills the most deals quietly.

Total funded debt is the SBA loan plus the seller note. Everything combined. Lenders look at that total as a multiple of EBITDA.

Quick note on EBITDA. That is earnings before interest, taxes, depreciation, and amortization. Similar to SDE but without the owner salary add-back. Lenders use it here because it measures raw business earnings.

When this ratio gets too high, the lender sees a business that is overleveraged. There is no single hard cutoff. But once you push past 4x, lenders get uncomfortable. Past 5x, most SBA lenders will not touch it.

Here is how this plays out in practice.

A business with $400,000 in EBITDA listed at $2,000,000. That is a 5x multiple. The SBA loan is $1.7 million. Seller note is $200,000. Total funded debt is $1.9 million.

Funded debt to EBITDA? 4.75x. That deal is on the edge.

Now take the same business at a 4x asking price. $1,600,000. SBA loan is $1.36 million. Seller note is $160,000. Total funded debt is $1.52 million.

Ratio drops to 3.8x. Same business. Different price. Completely different outcome with the lender.

This is why overpaying by even half a turn on the multiple can kill your deal.

Number Three: Seller Note Structure

Buyers think the seller note is a negotiation detail. It is not. It is a compliance issue.

When the deal includes an SBA loan, the seller note cannot compete with the SBA debt for cash flow. If the seller demands an amortizing note with monthly payments starting at close, that changes everything. Those payments reduce the cash flow available for SBA debt service. That directly damages your DSCR.

A ten-year full standby note at zero percent interest means zero payments for the full term. The seller waits. The cash flow stays intact. The DSCR stays healthy.

We close over 90% of our deals on those terms.

Now compare. Same million-dollar deal. Same $300,000 SDE. Same owner salary.

With a full standby seller note, your debt service is only the SBA payment. Roughly $138,000. DSCR is about 1.45x after owner salary.

Now switch to an amortizing seller note at 7% on $100,000 over 10 years. That adds roughly $14,000 a year in payments. Debt service jumps to $152,000. DSCR drops to 1.32x.

On a deal with tight margins, that $14,000 is the difference between approval and decline.

And it gets worse. Some sellers want a five-year amortizing note. That doubles the annual payment. A deal that looked fine on paper blows up at the lender's desk.

Here is a real example. We closed a painting contractor deal at $1.85 million. Seller note was $92,500 at 7% on a ten-year term. Not full standby. That deal still worked because SDE was $1,190,000. The DSCR was so strong that the amortizing note barely moved the needle.

Compare that to our NEMT deal at $1.25 million. Seller note was $125,000 on full standby at zero payments. SDE was $450,000. If that seller note had been amortizing at 7%? About $17,000 more per year. On a tighter margin like that, you feel it.

The painting contractor deal absorbed the amortizing note because the earnings were massive relative to the price. The NEMT deal needed the standby terms to keep the structure clean.

Same concept. Different math. Different outcomes.

How the Three Numbers Work Together

These three numbers are not independent. They form a chain.

DSCR depends on seller note structure. Total funded debt depends on purchase price relative to earnings. And all three have to pass simultaneously.

A deal with a great DSCR but a funded debt ratio of 5.5x still gets declined. A deal with reasonable leverage but an amortizing seller note that crushes the DSCR still dies.

Here is the order to check them. Run these before you spend a dollar on diligence.

Step 1: Run total funded debt to EBITDA. If the asking price creates a ratio above 4.5x, negotiate the price down or walk. Do not convince yourself the lender will make an exception. They will not.

Step 2: Model the DSCR with the expected seller note terms. If it does not hit at least 1.25x, the structure needs to change. Either the price drops or the note goes to standby.

Step 3: Confirm the seller note is on standby terms. If the seller will not agree, recalculate DSCR with the amortizing payments included. That new number is your real DSCR. Not the one without the note payments.

If the numbers do not work, the deal does not work. No amount of negotiation fixes bad math.

The Deals That Fooled Everyone

Here is what this looks like in practice.

Deal A. $1.5 million purchase price. $500,000 SDE. Service business, strong revenue, low seasonality. Clean financials. Great CIM. Looks perfect. Every buyer in the market would fight over this listing.

But the seller wants a five-year amortizing note at 7% interest. The buyer agrees because they do not know better.

SBA loan is roughly $1.27 million. Seller note is $150,000. Add the amortizing seller note payment of roughly $36,000 a year. Total annual debt service hits $183,000. Owner salary at $120,000. That leaves $380,000 in cash flow. DSCR lands at about 1.2x. Below the minimum. Lender declines.

Deal B. $1.2 million purchase price. $350,000 SDE. Tighter margins on paper. The CIM is nothing special.

But the seller agrees to full standby on the note. SBA loan is roughly $1.02 million. Seller note is $120,000 at zero payments. Annual debt service is only the SBA portion, about $118,000. Funded debt ratio is 3.4x. Owner salary at $100,000. Cash flow after salary is $250,000. DSCR lands at 2.1x. Lender approves without hesitation.

The "worse" deal on paper was structurally sound. The "better" deal was dead on arrival.

This is what separates buyers who close from buyers who search for eighteen months and never sign.

The Real Takeaway

Deal sizing tells you what you can afford. These three numbers tell you whether a specific deal is structurally viable.

Run these three numbers before you send an LOI. Not after. If you wait until the lender runs them, you have already wasted months and thousands in diligence costs.

The three numbers:

• DSCR above 1.25x minimum. Target 2.0x.
• Total funded debt to EBITDA below 4.5x.
• Seller note on full standby.

If all three pass, you have a fundable deal. If any one fails, fix it or walk.

This is exactly the kind of analysis our team runs on every single deal before it goes to LOI. If you want a team that does this every day handling it for you, we can help.

Learn more about how Regalis Capital can help you buy a business