Educational and advisory post (for business owners)

Bankability and DSCR have become quiet deal-killers in small business sales, often surprising owners late in the process. Many otherwise healthy businesses fail to sell at the desired price simply because their numbers do not support the debt buyers need to take on.

Why “what a buyer can finance” matters more than “what you think it’s worth”

Most owners think in terms of effort, years invested, and money spent on equipment and inventory. A common internal narrative is, “With everything I’ve put into this business, it has to be worth at least X.” Buyers and lenders see something different: they look at the cash the business can throw off after expenses and whether that cash can comfortably service acquisition debt. If the cash flow cannot support the debt at your target price, the business is not bankable at that price, no matter how extensive the asset list looks.

A plain‑English view of DSCR

Debt Service Coverage Ratio (DSCR) is simply a way of asking, “Does the business earn enough, with a cushion, to pay its loan payments?” DSCR compares the business’s net operating income to its total annual principal and interest. Lenders usually want more than a razor‑thin margin; they prefer a healthy cushion so the business can withstand surprises without missing payments. If your asking price pushes DSCR too low, the most common outcome is not a slightly tougher negotiation – it is that typical banks will not finance the deal at all.

The inventory and asset value trap

Owners frequently overestimate the value of their inventory and fixed assets when selling. Inventory that is old, slow‑moving, or customized may not be truly liquid at full book value. Machinery and equipment, especially if older or single‑purpose, may be worth far less on the open market than what you paid. Buyers know this and often apply heavy discounts because they carry the risk if they cannot turn that inventory or if they must replace equipment sooner than expected. The painful reality for many sellers is that the company’s earning power, not the sticker value of “stuff,” sets the ceiling for a financeable price.

How to make your business more bankable before going to market

Owners who prepare with a lender’s mindset give themselves a major advantage. That means:

• Cleaning up financial statements so cash flow is clear, verifiable, and not muddied by personal expenses.

• Identifying and writing down obsolete inventory rather than expecting full value at sale.

• Obtaining realistic opinions or appraisals on key equipment instead of relying on historical cost.

• Testing a proposed sale price against realistic financing terms and DSCR expectations.

When you frame your asking price in terms of what the business’s cash flow can actually support, you attract more serious buyers, shorten diligence debates, and reduce the risk of a bank declining the deal at the eleventh hour. For an owner, understanding bankability and DSCR is less about learning lender jargon and more about making sure years of work end in a successful, closable transaction.