Loan Payment Affordability Model

Provides another way to look at the estimated selling price. It focuses on whether the Company can afford the yearly payments for the loan used to buy it, by looking at a crucial metric called the Debt Service Coverage Ratio (DSCR). This ratio tells us if the company can handle its debts using the cash flow it generates, by examining earnings, expenses, and debt payments. In some cases, it could even lead to changes in the deal structure to make sure there's enough cash flow coming in to keep the business healthy.

The Debt Service Coverage Ratio (DSCR) is calculated using the formula:

DSCR = Adjusted EBITDA – CAPEX

                            Debt Service

Here's an explanation of the components:

1.  Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

• This represents the Company's earnings before deducting interest, taxes, and certain non-cash expenses (depreciation and amortization) and is a measure of the Company's operating performance and cash generation.

• Adjusted EBITDA includes the same adjustments made for valuation purposes. It is important to note that while buyers commonly accept these adjustments as they commonly represent non-operating, non-recurring, and/or owner-discretionary expenses, they may not be accepted by lenders given the stringent requirements placed on add-backs, especially if those expenses were deducted as expenses on the company tax returns. This is especially true regarding loans that are guaranteed by the government.

2.  CAPEX (Capital Expenditures)

CAPEX represents the amount of money a company spends on acquiring, maintaining, or improving its physical assets (like buildings, equipment, machinery, etc.). It is deducted from Adjusted EBITDA to reflect the cash used for investments in the business.

3. Debt Service

Debt Service is the total amount a company needs to pay for its outstanding debt, including principal and interest payments.