Battle for Supremacy: SDE/OB Versus underwriting Cash Flow

The calculation of 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 

Have questions? Call, text, or email and let’s discuss! 

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. 

wtinsley@firstib.com

(561) 802-1037

-Will Tinsley