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How to Calculate Debt Service Coverage Ratio [Tool]
Debt Service Coverage Ratio compliance often is required or necessitated by covenants in a bank loan agreement. A bank loan covenant regarding the debt service coverage ratio will specify the amount of income a business and/or its guarantor must generate relative to the debt principal and interest payments on an annual basis to remain in compliance with the covenant. The business owner, or his or her CFO or Controller, should monitor this ratio carefully on a monthly basis so the covenant is not unintentionally broken.
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What is a Debt Service Coverage Ratio?
The debt service coverage ratio is a measurement used by lenders to determine if a business is able to meet its debt servicing obligations through its operating income during a given period of time. In most cases, a lender wants the operating income to exceed the debt servicing costs by some measure. This ratio defines the extent to which a business’s operating income (or other defined measure of cash flow) exceeds the cost to service its bank loans.
The Advantages of Buying an Existing Business
Most individuals who consider themselves entrepreneurs believe they must start their own business to earn the title. However, what some do not realize is that the entrepreneurial spirit can be fulfilled in a variety of ways, not the least of which is purchasing an existing business. The following is a list of advantages for buying a business over starting one from scratch.
The Importance of Attitude in Buying a Business
People often overlook the attitude of the buyer and how greatly it can affect the outcome of the deal. Confidence is key.
Mezzanine Debt: Growth and Acquisition Capital
As markets recover post-recession, business owners are presented with growth opportunities. However, a business owner may not have access to the capital needed to execute on a growth strategy. Where does a business owner turn?
Employees Ownership Incentives — Implications When You Sell
Many entrepreneurs faced with the demands on cash of a growing business are tempted to sell equity to outside investors, or perhaps give away stock to retain a valuable employee. Diluting your stake in this way may solve the immediate problem, but it can have unforeseen consequences when the business eventually is sold. Stockholders’ personal circumstances evolve in different ways over the lifetime of a company, and whatever the original intention everyone may not be on the same page when you are ready to sell.
The Value of a Business Plan in Selling Your Business
A business plan is critical to the success of any business. And, if the plan is frequently reviewed and updated, it becomes increasingly valuable over time. It provides valuable historical information to help a business owner make decisions on the future direction of the company.
Non-Solicitation Agreement | How to Keep Your Best Employees
If you’ve grown a valuable business, there is no doubt your employees are a big part of your success. You also know that hiring, training, and managing a great team of productive employees is a difficult task. And keeping your best employees is yet another accomplishment! But the painful truth is your competition would be very pleased to hire away your best employees.
Multiple Business Structures: Their Combinations & Tax Consequences
Check out the website of your favorite fast food chain and you will see most have multiple business entity structures noted in the fine print. For a large business, this practice has been commonplace for decades. It involves layering one form of a business entity either alongside or in conjunction with an operating business.
What Happens to Debt When Selling a Business?
Many business owners are under the wrong impression that their business debt will disappear when their business is sold. In some cases, the debt is absorbed or is assumed by the buyer. But usually this is not the case.
Achieving Value Through Majority Recapitalization
Recapitalizations can be used to provide liquidity to owners, refinance the balance sheet or fund future growth initiatives. When the owners sell a majority of the business but still retains some ownership, it is termed a “majority recapitalization”.