DSCR (Debt Service Coverage Ratio)

DSCR (Debt Service Coverage Ratio) measures the business’s ability to cover its debt service with operating flow. It is calculated as EBITDA (or net operating income) divided by total debt service (principal plus interest) in the same period. In M&A it matters because lenders financing the acquisition require a minimum DSCR (typically 1.2×–1.5×) to approve credit; that requirement caps how much debt the buyer can use and affects the consideration structure (equity, seller note, bank credit).

How is DSCR calculated and what thresholds do lenders require?

Debt service is the sum of principal and interest paid in the period (usually annual). A DSCR of 1.0× means EBITDA exactly equals debt service; below 1.0× flow does not cover debt. Lenders require a minimum of 1.2× to 1.5× to approve acquisition credit: that gives cushion for EBITDA drops or rate increases. That requirement sets a ceiling on how much debt the buyer can take given the business’s normalized EBITDA; the rest of the price must be financed with equity or seller note.

How does DSCR affect financing and consideration structure?

In a leveraged buyout, the buyer aims to maximize debt to reduce the equity it injects, but the bank limits debt by DSCR. If the business has normalized EBITDA of MXN 5 M and the bank requires minimum DSCR 1.25×, annual debt service cannot exceed MXN 4 M (5 ÷ 1.25). That translates into a maximum loan amount given the rate and term. If that credit is not enough to finance the buyer’s offer, the buyer must put in more equity or negotiate a larger seller note (or earn-out). So DSCR directly affects consideration structure: how much cash at closing, how much bank debt, and how much seller note. A seller who understands DSCR can anticipate why the buyer is asking for a given mix of cash and note. The seller note calculator projects note payments; DSCR is reviewed with the buyer and its bank when structuring the deal.

What does DSCR look like in a real acquisition with MXN figures?

Illustrative example — business with annual normalized EBITDA of MXN 6 M. The buyer evaluates two leverage levels. Reference rate: 14% annual, constant principal amortization, 10‑year term.

In the high‑leverage scenario, a bank requiring 1.35× would reject the deal; the buyer would have to reduce the credit and cover the shortfall with more equity or seller note. Normalized EBITDA is the base both for valuation (multiple) and for this debt capacity analysis.

What do buyers and sellers ask about DSCR?

What minimum DSCR do banks in Mexico require to finance an acquisition?

In SME and mid‑market credit in Mexico, lenders require a minimum DSCR of 1.2× to 1.5× (sometimes 1.25×–1.35× in more conservative deals). That means the business’s EBITDA must be 1.2 to 1.5 times annual debt service (principal + interest). A DSCR below 1.0× means operating flow does not cover debt service. The exact requirement depends on sector, the buyer’s track record, and the bank’s policy.

How does DSCR affect consideration structure in a sale?

If the buyer finances part of the purchase with bank debt, the bank limits the loan amount by the minimum DSCR it requires. More debt means higher annual service; if the business’s EBITDA is not enough for a 1.2×–1.5× DSCR, the buyer cannot take as much credit and must use more equity or more seller note. So DSCR affects how much cash at closing the buyer can offer and the proportion of seller note: when room for bank debt is limited, the seller note becomes more important.

Is EBITDA or cash flow used to calculate DSCR in M&A?

In M&A and acquisition credit covenants EBITDA is often used (usually the normalized EBITDA agreed between buyer and seller) as a proxy for operating flow available for debt service. It is a simplification: EBITDA does not deduct capex or working capital changes, but lenders accept it as the standard metric and define in the credit agreement whether the ratio is calculated with EBITDA, EBIT, or a defined flow. For the seller who receives a seller note, what matters is that the business generates enough flow for the buyer to pay bank debt and the note; DSCR with EBITDA gives a first approximation.

How can I estimate whether my business can support a seller note plus bank debt?

Calculate total debt service (principal + interest) the buyer would have after closing: bank debt + annual service on the seller note. Divide the business’s normalized EBITDA by that total service; if the result is at least 1.2×–1.5×, the business has cushion for that structure. If DSCR falls below the threshold, the buyer will have trouble getting credit or meeting the seller note and may ask for more equity, less note, or a lower price. The seller note calculator helps project note payments; DSCR is reviewed with the buyer and its bank when structuring the deal.