“The Bank Said the Business Is Overpriced” — Now What?

This week’s question comes from a buyer who was trying to get financing for a business purchase. But the banker came back with two tough comments:

“The business is overpriced, and your Debt Service Coverage Ratio (DSCR) doesn’t work.”

Naturally, the buyer wants to know: Should I try another bank?

Let’s unpack what the banker really means and how to make your next move a smart one. https://youtu.be/Q1yOzL73zCo 

First, What’s DSCR and Why Do Banks Care?

DSCR stands for Debt Service Coverage Ratio. It measures how much cash is available to cover debt payments after operating expenses.

Quick Example:

• Annual cash flow: $100,000
  
  

• Annual loan payments: $50,000
  → DSCR = 2.0
  
  

This means you have $2 in cash for every $1 you owe pretty healthy.

Banks rely on this number to assess risk. If your DSCR is too low, they see your deal as fragile.

Real Estate vs. Business Loans: Key Difference

In real estate, DSCR thresholds are lower. For example:

• A rental property might qualify with a DSCR of 1.25
  
  

But a small business?
Different story.

Business income is far more volatile. Customers leave. Costs spike. You might lose key staff. That’s why I advise buyers to aim for a DSCR of at least 2.0 when acquiring a business.

That gives you cushion for taxes, surprises, reinvestment, and yes, sleep.

The EBITDA Trap: Why Paper Profit ≠ Real Cash

Many sellers (and even some buyers) point to EBITDA or Seller’s Discretionary Earnings (SDE) as proof of strong performance.

But here’s the issue:
Loan principal payments don’t show up in EBITDA. Neither do taxes.

So while the profit looks healthy, you may have little left after financing and Uncle Sam takes their share.

That’s why:

A solid cash flow forecast is essential.
You need to model:

• Realistic revenues & expenses
  
  

• Loan amortization schedules
  
  

• Anticipated taxes
  → Only then can you confidently say, “Yes, I can afford this business.”

So... Is the Banker Wrong?

Probably not.

If the banker said, “Your DSCR doesn’t work,” they’re likely flagging one (or more) of these:

🔹 The Price Is Too High

Plain and simple—cash flow doesn’t support the asking price.

🔹 You’re Under-Capitalized

Maybe you’re trying to borrow too much. If so, they might mention the debt-to-equity ratio too.

🔹 The Financials Are Misleading

This happens often in small business deals:

• The seller includes real estate income in the business
  
  

• One-time profits inflate the numbers
  
  

• They haven’t accounted for owner compensation properly
  
  

When sellers represent themselves (without a broker), these red flags show up a lot. Emotions often override financial reality.

Tip: Normalize Before You Analyze

Always “normalize” the business financials before you crunch the numbers.

Especially if the building is included.

For example:
If the current owner has no mortgage, that “free rent” makes the business look artificially profitable. But if you have to buy the building or rent it from the seller, suddenly cash flow drops.

The bank knows this.
And they’ll model the deal accordingly,even if the seller doesn’t.

Should You Try Another Bank?

You can. But unless something in the numbers changes, the next bank will likely say the same thing.

If the DSCR doesn’t support the price, it’s not a banking problem—it’s a valuation problem.

What to Do Instead:

• Re-run the numbers with normalized financials
  
  

• Create a realistic cash flow forecast
  
  

• Go back to the seller with a revised offer (if warranted)
  
  

• Be ready to walk if the deal just doesn’t pencil out
  
  

Remember: The bank is your partner in due diligence.
If they see red flags, it’s worth a second look.

Want to Go Deeper?

These are exactly the kinds of issues I walk buyers through in my online course, www.BusinessBuyerAdvantage.com 

Inside, you’ll learn:

• How to find businesses worth buying
  
  

• How to analyze financials with confidence
  
  

• How to build offers that actually get financed
  
  

• What banks look for—and how to prepare your deal
  
  

There’s even a full case study, walking through a real-world deal from search to close.

Bottom line:
If your deal doesn’t work on paper, it won’t work in reality.
The sooner you understand DSCR and real cash flow, the better your chances of buying a business that’s not just exciting—but sustainable.

Don’t forget—join my email list for early access to my latest videos and insights at DavidCBarnettList.com . You’ll even receive 7 FREE gifts when you sign up.

– David C. Barnett

Insightful Interview with Giuseppe Grammatico, Host of The Franchise Freedom Podcast

Franchise Warnings & Smart Investing: A Conversation with David C. Barnett
 

 recently joined Giuseppe Grammatico for a powerful conversation about the newly updated edition of my book, "Franchise Warnings." We covered some critical topics that every aspiring franchise owner should consider before making the leap.

Here’s what we dive into:

• The dark side of franchising — what can go wrong and how to protect yourself

• Due diligence done right — why it’s vital to speak with both veteran and newer franchisees

• Franchise vs. independent business — what you’re really buying into

• The role of AI & technology — how franchisors should be helping you stay competitive

• Ethical franchising — what to look for in a responsible, long-term partner

If you're thinking about buying a franchise (or advising someone who is), this episode is packed with actionable advice to help you make a smarter, safer decision.

Conflicts of Interest undermine Small Business Buyers

 

***New Video Alert!

Your lawyer, accountant and other professionals work for you to get the best deal and protect your interests.

Right?

But, are you sure?

The very dangerous world of conflicted interests in this week’s video: https://youtu.be/MwJWD52Byjw 

Cheers

See you over on YouTube

David C Barnett

How to Find and Approach Business Owners Before They List Their Business for Sale

“The Bank Said the Business Is Overpriced” — Now What?

This week’s question comes from a buyer who was trying to get financing for a business purchase. But the banker came back with two tough comments:

“The business is overpriced, and your Debt Service Coverage Ratio (DSCR) doesn’t work.”

Naturally, the buyer wants to know: Should I try another bank?

Let’s unpack what the banker really means and how to make your next move a smart one. https://youtu.be/Q1yOzL73zCo

This is one of the smartest strategies in the business acquisition world. Here’s why:

When a business gets listed with a broker, two things happen:

1. Competition surges — multiple buyers show up, and
   
   

2. Prices rise — often beyond what a savvy buyer wants to pay.
   
   

That’s great for sellers. But for buyers? It’s an uphill battle.

Instead, what if you could build relationships with owners before they ever consider selling? That’s where the real opportunity lies.

The Strategy: Beat the Broker to the Door

If you want to find quality businesses at fair valuations, you need to show up before the “For Sale” sign goes up. Here’s how to do it right:

✅ Step-by-Step Guide

1. Know What You’re Looking For

Before you approach anyone, you need to be clear about what you want.

Ask yourself:

• What industries interest me?
  
  

• What skills and experience do I bring?
  
  

• What’s my ideal role as an owner?
  
  

• Do I want something owner-operator or hands-off?
  
  

This self-assessment helps narrow your focus and makes your outreach much more credible.

2. Set Your Financial Parameters

Next, define your buying power:

• How much capital do you have?
  
  

• What kind of financing can you secure?
  
  

• What’s the minimum income you need from the business?
  
  

This determines the size and structure of the businesses you should pursue.

3. Build a Target List

With your filters in place, start researching businesses that:

• Fit your chosen industry and size
  
  

• Operate in your geographic area (unless you're open to relocation)
  
  

• Have owners who may be nearing retirement or looking to slow down
  
  

• Appear stable but may lack clear succession planning
  
  

This is where tools like LinkedIn, Google Maps, local trade associations, and business directories come in handy.

4. Make the First Move — With Tact

This is not a sales pitch.

It’s an introduction.

Reach out by email, letter, or even an old-fashioned phone call. Say something like:

“Hi, my name is [Your Name]. I’ve been researching businesses in [industry], and I came across yours. I admire what you’ve built. I’m exploring business acquisition as my next career move, and if you’re ever open to a conversation—now or in the future—I’d love to connect.”

Keep it low-pressure. You’re building rapport, not making an offer.

5. Play the Long Game

Most business owners won’t reply with:

“Funny you should ask, I've been dying to sell!”

But here’s what can happen:

• They remember you
  
  

• Time passes
  
  

• Life events occur (health issues, burnout, family needs, etc.)
  
  

• You become the person they reach out to first
  
  

No broker. No bidding war. Just you and the seller, having an open, private conversation.

Consistency Wins

This approach isn’t about quick wins. It’s about building a pipeline of future opportunities. When others are chasing listings, you’re building relationships.

That’s why in my 12-step coaching program, we teach exactly this process:

• How to define your criteria
  
  

• How to assess your buying power
  
  

• How to find and qualify target businesses
  
  

• How to craft outreach messages
  
  

• How to follow up and stay top-of-mind
  
  

It’s a discipline but it works.

💬 Final Thought

If you want to be taken seriously by a business owner before they’ve even considered selling, you need to:

• Show up early
  
  

• Show genuine interest
  
  

• Stay in touch without pressure
  
  

This is how the best deals are found not on websites or broker listings, but in private, well-timed conversations that you created.

Explore free tools, guides at www.BusinessBuyerAdvantage.com
  

Don’t forget—join my email list for early access to my latest videos and insights at DavidCBarnettList.com. You’ll even receive 7 FREE gifts when you sign up.

– David C. Barnett

Business Buyers are Legally Naked

 

***New Video Alert!

Today, how business buyers are NOT consumers.

Don’t be naïve and expect government rules to apply to you.

Here’s how you protect yourself and how some have been had.

I’ll tell you what I really think in this week’s video: https://youtu.be/MosMaS9eBTQ 

Cheers

See you over on YouTube

David C Barnett

LIVE Timothy L Smith- Avoid Investment Fraud

 

Avoid Investment Fraud

New Livestream guest- Timothy L. Smith

I’m happy to have Tim join me on a live broadcast.

Tim has decades of experience helping people with their investments.

Tune in as we’ll be discussing fraud, bad investments and really dumb investment choices.

This is a ‘must see event’ for anyone who doesn’t want to get ripped off or robbed.

Be sure to join live so that you can ask questions, replay will be available.

Set yourself a reminder on YouTube here: https://youtube.com/live/lgalgxSAJi0 

We’ll be going live Monday July 21, 2025 at 1 PM Atlantic Time and 12 Noon Eastern Time

See you there!

David C Barnett