Improve your DSCR by boosting profitability (raising revenue or cutting costs), reducing debt, managing cash flow effectively, and enhancing operating performance. This increases your business’s appeal to buyers and lenders, facilitating a smoother exit.
To improve your DSCR and make your business more attractive for a sale, consider these actions:
- Increase profitability: Increase your revenue or reduce operating expenses to increase your cash flow
- Reduce debt: Pay down existing debt to lower your debt service obligations.
- Manage cash flow: Improve your company's cash flow management to ensure you have sufficient cash available to meet debt obligations.
- Improve operating performance: Historical operating performance is an important metric for lenders.
By understanding DSCR and taking proactive steps to improve it, you can significantly enhance your business's appeal to potential buyers and lenders, leading to a smoother and more successful exit.
Those four levers are the whole formula: raise the numerator, cut the denominator, or both.
On the numerator, lenders underwrite cash flow they believe will repeat. Price increases, mix shifts, and cutting non-essential spend all help. One-time add-backs do not, unless a quality of earnings review supports them. Clean the books 12 to 24 months before a sale so the trailing history matches the story.
On the denominator, refinancing to a longer amortization, paying down expensive junior debt, or moving a shareholder loan to standby can drop debt service. Watch the trade. A balloon or interest-only structure that looks good at close can fail a lender's stressed-rate test.
Working capital discipline matters because DSCR is a cash test, not an accrual test. Faster collections, tighter inventory, and fewer owner distributions leave more cash to service debt.
Do the math the way a lender will. Build a trailing-twelve-month DSCR and a pro forma DSCR that includes the buyer's new acquisition debt and a seller note. The second number is the one that sizes the loan and, often, the price.
This is general education, not legal, tax, or lending advice. Confirm the definition your lender is using before you change capital structure around a target ratio.