• Tue, Feb 14, 2023
  • Battle for Supremacy: SDE/OB Versus Underwriting Cash Flow Series 2 – Issue 1 – Cash Flow
  • Will-tinsley_(1)
  • The calculation of the Seller’s Discretionary Income or Owner Benefit is not the same as what SBA lenders use for Underwriting Cash Flow (UCW). This matters because UCW determines how much SBA money a buyer can borrow towards the purchase of a business.

    UCW is the starting point of every SBA acquisition, can make it or break it, and determines how much equity a buyer will need (10%, 15%, or 20% for example).

    So, what is it exactly?

    Underwriting Cash Flow

    Here’s the most basic calculation of UCW:

         EBITDA + Owner Salary (W2 or Management Fees)

    There are no other addbacks in the basic equation other than what comes directly off the tax return (EBITDA and Owner Compensation). None! This number is almost always less than the calculation of SDE/OB. Remember this as you field questions from buyers and lenders who say cash flow is only “X”.

    Next, we have to assume the Buyer will take money out of the business, which we call a buyer draw:

         EBITDA + Owner Salary (W2 or Management Fees) – Buyer Draw

    Last, we will divide UCW by the loan payments which gives us a ratio (more formally “Debt Service Coverage Ratio”, a term you may have heard before):

         EBITDA + Owner Salary (W2 or Management Fees) – Buyer Draw
                                SBA 7a loan payments for 12 months

    Mystery solved! This is the first thing underwriters calculate when they look at a deal.

    In the next installment, we’ll modify the equation even more, discuss the specific components, and I’ll show you how one buyer can be declined, while another can be approved, for the exact same business.

    Do you really need to know this?

    Understand it, yes. But if you do not want to worry about it, no problem. Just call me on your next deal and I’ll do the analysis for you.




    Coming soon to your inbox!

    Series 2-2 – Buyer Draw – how to calculate

    Series 2-3 – Addbacks – what works and what doesn’t

    WILL TINSLEY
    VP - SENIOR BUSINESS DEVELOPMENT OFFICER
    [email protected]
    561.802.1037 Mobile
    WWW.FIRSTIB.COM