Thoughts on historical SDE to support debt servicing?

searcher profile

February 08, 2024

by a searcher from University of Southern California in Franktown, CO 80116, USA

I am interested to get the communities input, knowing everyone's risk tolerance is different. How many years back need to support the debt service of acquiring a company? I see many CIMs showing only the most recent year, maybe two that support the debt. I am asking outside of a bank's opinion on this, just personal comfort with that risk. Thank you in advance!

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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
On both sides of that question and answer, does that fact that a company could cover the new DSCR using 2019 results give you much comfort for 2024 and 2025? Conversely, that they couldn't in 2020 or 2021 due to Covid bring you significant pause? Most lenders look back three years with less emphasis on the older years. Being able to cover five years would certainly indicate stability, but also stagnant growth.
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Reply by a searcher
from Duke University in Tulsa, OK, USA
When I was searching I was told by someone to make sure the SDE can support the bank loan for each of the last 5 years. If it can’t then you need a lower price or more seller financing until you can historically make the bank loan.

I thought it was good advice and I disqualified many businesses because of it but I would do the same again.
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