Most owners think valuation is about negotiation.
It is not.
It is about debt service coverage.
Here is how a bank evaluates your deal in simple terms.
How much debt can this business safely carry?
That answer determines how much a buyer can pay.
The key metric is Debt Service Coverage Ratio.
In plain English:
After paying operating expenses, how much cash is left to pay principal and interest?
Most lenders want to see at least 1.25 times coverage.
Meaning:
If annual loan payments are eight hundred thousand dollars, the business should generate at least one million dollars in available cash flow.
If coverage is tight, leverage drops.
If leverage drops, the buyer must inject more equity.
If the buyer injects more equity, they lower the purchase price to protect their return.
This is why inflated add-backs do not increase valuation.
This is why volatile earnings compress multiples.
When we analyze a company before going to market, we do not start with “What multiple do you want?”
We start with “What will a bank support?”
Then we structure accordingly.
If you would like to see what your business supports under real underwriting assumptions, we can run a confidential Strategy Session.
Valuation becomes clear when you understand leverage.