Acquisition deal screen — methodology

The acquisition deal screen answers one question: can the structure you entered carry the debt service that structure implies, measured against a coverage benchmark you choose? It is a screening calculation on figures you supply. It is not lender underwriting, not a valuation, not a prediction of any lending decision, and not legal, tax, or accounting advice.

Every figure on the screen is derived from what you entered, using the arithmetic below. Nothing is assumed from outside: no market rates, no typical terms, no lender criteria. When a figure the arithmetic needs is missing, the screen names the missing figure rather than filling the gap.

Total uses of funds is everything the transaction has to pay for:

Total uses of funds = asking price + working capital + closing costs

Working capital and closing costs are treated as uses of funds carried by the financing, not as cash the buyer has on hand. Both are optional and default to zero. Neither can be negative — a negative use of funds would shrink the deal below its own price — so the screen asks for a corrected figure instead of calculating on one.

Cash available for debt service is the annual cash the screen treats as available to pay lenders:

Cash available = SDE − buyer owner compensation − other subtractions

Both subtractions are figures you supply, and both reduce cash available. The screen applies no accounting standard of its own to either: it subtracts exactly what you enter. Buyer owner compensation is what the buyer intends to pay themselves to run the business. Other subtractions are whatever else your judgment says the SDE figure should not keep — capital expenditure, deferred maintenance, an add-back you do not accept.

Neither subtraction may be negative, because a negative entry in a field defined as a subtraction would quietly add cash back and lift every ratio on the screen. If cash available comes out at zero or below, the screen reports that instead of a ratio: a coverage ratio needs something above zero to divide.

Three sources fund the total uses: the buyer's own cash, any seller note, and bank or SBA debt. You enter the first two. The third is derived:

Bank/SBA loan = total uses of funds − buyer equity − seller note

This is why the worksheet asks for a bank rate and a bank term but never a bank amount: the amount is whatever the deal still needs once the buyer's cash and the seller note are in place. If those two together exceed the total uses, the structure is over-funded, and the screen says so rather than reporting a negative loan.

Buyer equity and the seller note can each be entered as a dollar amount or as a percentage. A percentage is always a percentage of the asking price — never of the total uses of funds. When working capital or closing costs are present the two differ, so the same percentage entry funds a smaller share of what the deal actually has to pay for. The worksheet shows both figures side by side whenever they diverge.

The bank loan and an amortizing seller note both use the standard level-payment formula, the same one published for the rest of the site:

Payment = P · r ÷ (1 − (1 + r)^−n), where P is the principal, r is the monthly rate (the annual rate entered ÷ 12), and n is the term in months

At a 0% rate the payment is simply principal ÷ term. Payments are rounded to cents. The screen uses the rate and term you enter, never supplies either, and never adjusts one because of the other.

A seller note may be on standby: subordinated to the bank debt, with its payments suspended for a period. Three cases are modeled.

• No standby — the note amortizes from closing over its full term.
• Partial standby — no scheduled amortization during the standby years, after which the note amortizes over whatever is left of its total term.
• Full-term standby — no seller-note payments at all inside the screened period, so the note adds nothing to the coverage ratio. Whether interest accrues behind the standby is set by the note itself; the screen makes no claim either way, and any accrued balance or balloon afterwards sits outside the ratio.

A standby period equal to or longer than the note's total term leaves no amortization period at all. That is a balloon or full-deferral structure and needs separate modeling, so the screen asks you to shorten the standby or choose full-term standby rather than reporting a figure for it.

For a partial standby you also state what the note does while payments are suspended, because "interest accrues" can mean two materially different things: interest waived, or interest paid as it comes due. Those are different structures with different coverage, so the screen never infers it — the note decides it. The four treatments are:

• No payments, interest waived — nothing is paid and the balance is unchanged, so the original note amount amortizes after standby.
• Interest-only payments — interest is paid as it comes due, so it counts as debt service during standby; principal is untouched.
• No payments, simple interest — unpaid interest is added to the balance without compounding: balance = P · (1 + r · Y).
• No payments, interest compounded monthly — unpaid interest compounds into the balance: balance = P · (1 + r/12)^(12Y).

Where interest joins the balance, the larger balance is what amortizes when standby ends. The screen reports that balance rather than burying it inside a payment.

A coverage ratio describes one year, but the debt load in an acquisition structure changes over time: a standby ends, a loan is repaid. So the screen lays twelve-month windows over the actual payment streams and counts, in each window, only the payments that fall inside it. A loan repaid partway through a window is charged for the payments that remain in it, not for a full year.

Without a standby there is one window: the deal's first twelve months, with every loan paying on schedule. With a full-term standby there is likewise one: twelve months of bank payments, and no seller-note payments.

With a partial standby, two windows are always screened — the deal's first year, and the year that opens the moment standby ends. A third is screened when one loan's last full year begins before the other's payments start. Such a window carries twelve payments of one loan and the first payments of the other at once, and can be tighter than either named period. Because it sits between them, a deal can clear both named periods and still be squeezed in the middle. That is why it is screened as its own transition period, and it appears only when it is genuinely heavier than both named windows.

For each window the screen divides cash available by that window's total debt service:

Screening DSCR for a window = cash available ÷ total debt service in that window

Where a window carries no debt service at all there is no ratio to report, and the screen says so rather than printing a number. Ratios are shown to two decimals.

When more than one window is screened, the screening DSCR is the lowest of them, and that window is the binding period — the tightest the entered structure ever gets. It is named beside the result so it never has to be hunted for. When only one window is screened there is nothing for it to be the lowest of, and the screen reports the ratio without using the word.

The ratio is compared with the benchmark as a distance, and only as a distance. Clearing a screening benchmark is not an approval, and falling below one is not a denial.

The benchmark is yours, not ours. CloserToDone publishes no threshold, recommends none, and applies no default beyond a starting value you can change. Set it to the threshold that is actually relevant to the deal in front of you.

The benchmark source field records where that threshold came from, in your words, and prints on the screening summary exactly as you type it. It starts empty for that reason: left blank, the summary states that no source was entered rather than printing something that would read as a citation.

The benchmark is a multiple, not a percentage: 1.25 means 1.25 times the debt service. An entry an order of magnitude above any screening threshold is flagged as a probable percentage, and the screen then calculates with the number as entered rather than silently correcting it.

Lender programs and their guidance change over time. Confirm the threshold and the treatment applicable to the deal you are screening.

The screen also reports the price at which the binding period would land exactly on the benchmark, holding everything else you entered fixed. Raising the price raises the derived bank loan, which raises debt service and lowers coverage, so coverage falls as the price rises and there is at most one crossing. The screen finds it by repeated bisection and then re-screens the answer, reporting a price only when that price genuinely lands on the benchmark.

Two outcomes are not prices, and the screen keeps them apart rather than conflating them. A structure can fall short of the benchmark at every price it supports — coverage is already below the benchmark before any price-driven debt is added. And a structure can stay above the benchmark at every price searched, when buyer equity and the seller note absorb effectively the whole price so raising it adds no meaningful bank debt. The first falls short throughout; the second clears throughout. Neither has a crossing price to report.

Where the percentages entered for buyer equity and the seller note exceed the whole price between them, raising the price shrinks the bank loan instead of growing it, coverage stops moving in one direction, and no single price answers the question. The screen says that rather than reporting the boundary where the structure stops holding together.

A solved price is only the price at which the entered structure mathematically reaches the benchmark you chose. It is not a valuation, not an offer, and not advice on what to pay or to accept.

The figures are only as good as what was entered, and the screen verifies none of it. In particular, it does not determine or assess:

• Any lender's underwriting criteria, or any lending decision
• Whether a buyer will obtain financing on these or any terms
• Whether the seller's reported earnings are accurate
• Whether add-backs are reasonable, or acceptable to anyone
• The value of the business, or whether the price is appropriate
• Tax, legal, or accounting consequences of the structure
• Balloons, maturities, or refinancing after the last screened window
• Anything not entered into the worksheet

Figures you enter stay in your browser. They are not saved, not sent to CloserToDone, and never included in usage analytics.