SBA lenders calculate debt service coverage ratio, or DSCR, by dividing the cash flow the business is expected to have available for debt payments by the annual payments on that debt. On an acquisition, the cash flow side usually starts from the company's historical earnings, adds back costs that will not continue after the sale, and subtracts a salary for whoever will run the business. The debt side includes the new loan and, commonly, any note carried back by the business owner. Any adjustment a quality of earnings report makes to earnings moves the top of that fraction.
DSCR is a ratio: cash flow available for debt service divided by annual debt service. A result of 1.0 means the business generates exactly enough to make its payments and nothing more. Above 1.0 leaves a cushion. Below 1.0 means the payments are not covered from operations.
On an acquisition, the debt is new and the owner is new. The lender is asking whether earnings the company produced under the current owner will cover payments the buyer has not started making yet. That puts the quality of the historical earnings at the center of the calculation.
The SBA sets a minimum coverage level for 7(a) loans in its SOP, and lenders commonly set their own internal targets as well. Confirm with your lender which figure it applies and on what basis: historical results, projections or both.
The details vary by lender, but the build commonly looks like this:
| Item | What it is | Treatment |
|---|---|---|
| Starting earnings | Net income from the filed tax returns or the company's financial statements, often the most recent full year and the trailing twelve months | Starting point |
| Interest, depreciation and amortization | Non-cash charges, and interest on debt that is paid off at closing | Added back |
| Owner compensation and benefits | What the current owner took out of the business | Added back |
| Documented one-time and personal costs | Costs that will not recur under the new owner, with support | Added back |
| Replacement salary | Market pay for the buyer or a hired manager to run the business | Subtracted |
| New costs after closing | Rent at new lease terms, added staff and similar items | Subtracted |
Some lenders also subtract taxes or an allowance for capital spending, and many run a global cash flow that brings in the buyer's personal income and debts. The lender's credit policy sets the method. A QoE tests the inputs.
Annual debt service is the total of principal and interest payments due in a year on the debt the business will carry after closing. On an acquisition, that commonly includes:
Notes carried back by the owner are where lenders differ most. A note on full standby, with no payments for a set period, may be left out of the calculation for that period. A note that pays from the first month usually counts. Confirm with your lender how it treats the note in your deal, and talk to your attorney about how the standby terms are written.
The lender's calculation depends on the earnings figure it starts from. In many deals, that figure comes from the CIM: an SDE or adjusted EBITDA number with a list of add-backs. A QoE tests that figure. When an add-back has no document behind it, or a "one-time" cost shows up year after year, the tested earnings come down and the cash flow available for debt service comes down by the same amount.
An illustration with round numbers. A CIM shows $1,000,000 of SDE. The buyer plans to hire a general manager at $150,000. The proposed SBA loan carries $500,000 of annual payments, and a note carried back by the owner adds $100,000 a year.
| Line | Per the CIM | After QoE testing |
|---|---|---|
| SDE | $1,000,000 | $850,000 |
| Less: general manager salary | (150,000) | (150,000) |
| Cash flow available for debt service | 850,000 | 700,000 |
| Annual debt service | 600,000 | 600,000 |
| DSCR | 1.42 | 1.17 |
The $150,000 difference comes from three findings: $80,000 of add-backs with no documents behind them beyond the owner's description, a $40,000 cost presented as one-time that appears in two of the last three years, and $30,000 of revenue that the company's cash-basis books recorded in the trailing twelve months for work performed in the year before. None of these change the loan. All of them change how well the loan is covered.
Whether 1.17 works depends on the lender's minimum and the rest of the file. What changed is the source of the number. More on which add-backs tend to hold up is in which add-backs survive diligence, and on the two earnings measures in SDE vs EBITDA.
Lender underwriting and a QoE answer different questions. Underwriting asks whether the cash flow covers the payment. A QoE asks whether the cash flow is there. A credit analyst commonly works from the tax returns, the financial statements and the add-back schedule that came with the deal, and usually does not tie revenue to bank deposits or request the support behind the add-backs.
Those are the first procedures in a full QoE: cash proof and bank statement reconciliation, reconciliation to three years of filed tax returns and IRS transcript data, and documented add-backs and adjustments. The full list of ten is on the quality of earnings page. If a figure cannot be tied to a source document, the report says so and shows the remaining difference rather than estimating it.
On larger deals, a QoE is now part of the SBA rules. Under SBA SOP 50 10 8.1, effective October 1, 2026, Initial Acquisition and Business Expansion loans where the business purchase price is $3 million or more need a QoE from an independent financial professional engaged by and acting on behalf of the lender. The threshold is the price in the purchase agreement less owner-occupied real estate at appraised value. The buyer's equity injection and any note carried back by the owner are not deducted. How we work on lender engagements is on the SBA lenders page.
Often, yes. A trailing twelve month DSCR says the business covered the payments last year. A projection asks whether it will keep covering them after closing.
A full QoE includes a five-year monthly projection model built from the tested historical results. The monthly view matters. A business can cover its debt over a full year and still run short of cash in its slow months, when payments are due anyway. Working capital matters for the same reason: receivables, inventory and payables can tie up cash that an annual ratio does not show. The working capital analysis shows the level the business normally runs on, by month.
Projections are assumptions. The model makes them visible, so the buyer and the lender can test a slower season or a higher rate.
Our fee is $7,500 flat for SBA-sized deals, whether or not SBA financing is used. Larger deals are scoped and priced to the work after a call, and the fee is quoted before work starts. There is no hourly billing. An added fee applies when the company has no financial statements and they have to be built, or when the deal includes more than one business, quoted once the documents are in. The work generally takes two to four weeks from receipt of documents, and the company's response time sets most of the pace. Details are on the pricing page.
The deliverable is a full report in a slide deck plus the workbook, walked through on a call.
The SBA sets a minimum in its SOP for 7(a) loans, and lenders commonly set their own target, sometimes higher. Some apply it to historical results, some to projections and some to both. Confirm the figure and the basis with your lender before the price in the LOI is final.
On owner-operated businesses, lenders commonly start from owner cash flow and then subtract a market salary for whoever will run the business. The result is close to adjusted EBITDA. Either way, the add-backs behind it are what the QoE tests.
It can, when it finds documented adjustments the CIM left out. It can also lower it. The report describes what was tested and the remaining differences. It does not start from a target ratio.