Educational content only. This describes general commercial-lending practice and is not financial, lending, or legal advice. Every lender and every deal is different. Consult your own commercial banker and accountant for your specific situation.
If you ask a commercial lender what debt service coverage ratio you need to buy a practice, you'll almost always hear the same number: 1.20x. Some say 1.25x, a few say 1.15x for strong files. It gets quoted like a speed limit — a hard line you either clear or you don't.
The 1.20x figure is real but badly misunderstood. Treating it as a simple pass/fail is how borrowers with genuinely good deals get blindsided by a decline, and how borrowers with shaky deals occasionally slip through and then struggle. The number matters, but what matters more is how the underwriter builds the DSCR calculation — because that's where deals are actually won and lost. The DSCR a borrower computes from the seller's financials is almost never the DSCR the underwriter computes.
This is what's really happening when a lender evaluates an acquisition loan, and what a buyer can do with that understanding.
What DSCR Actually Measures
Debt service coverage ratio is simple in concept: the income available to service debt, divided by the debt payments. A DSCR of 1.20x means the business generates $1.20 of available income for every $1.00 of loan payment — a 20% cushion above breakeven on the debt.
The lender's logic is straightforward. At exactly 1.0x, every dollar of available income goes to the loan payment, leaving no margin for a slow month, a rate increase, or an unexpected cost. The cushion above 1.0x is the lender's protection against the loan going bad. 1.20x is the level most commercial healthcare lenders have settled on as the minimum cushion they're comfortable with for a stable, established practice.
So far, so standard. The complication — and the part borrowers miss — is that the underwriter does not simply take the numbers off the seller's financials and divide. They rebuild both halves of that ratio before they calculate it. The DSCR you compute from the seller's tax return is almost never the DSCR the underwriter computes.
How the Underwriter Rebuilds the Numerator
The top of the ratio is "income available for debt service." Borrowers tend to assume this is the practice's net income or its EBITDA. The underwriter sees it differently, and makes several adjustments that usually lower the number you were counting on.
They normalize owner compensation to a market replacement. This is the big one. If the selling owner is a producing clinician, a buyer will need to either work in the practice themselves or pay someone to do that clinical work. The underwriter subtracts a market-rate clinician salary from the income before calculating coverage, because that's a real cost of running the practice that the seller's "owner takes everything as profit" structure was hiding. A practice that looks like it throws off $400,000 might have $250,000 of true income-available-for-debt once a replacement clinician salary is subtracted. The DSCR gets calculated on the $250,000.
They strip out add-backs they don't believe. Sellers and brokers present "adjusted" earnings with a list of add-backs — expenses they argue won't continue under new ownership. Underwriters accept some and reject others, and they're skeptical by default. (That's a whole topic in itself — there's a separate article on which add-backs survive scrutiny.) Every rejected add-back lowers the income figure the DSCR is built on.
They use conservative, often trailing, revenue. Underwriters generally work from actual historical performance, not the buyer's projections of growth. If revenue has been flat or declining, they use the conservative recent figure, not an optimistic forward number. Your business plan might be credible, but the underwriter sizes the loan against what the practice has actually done.
How They Rebuild the Denominator
The bottom of the ratio is the debt payment — and here too the underwriter often uses a number larger than the one you're planning around.
They stress the interest rate. Many underwriters calculate DSCR not at today's rate but at a stressed rate — today's rate plus a cushion, or a floor rate — to confirm the loan still covers if rates rise. Your deal might clear 1.20x at the quoted rate and fail at the stressed rate the underwriter actually uses.
They include all the debt, not just the acquisition loan. If you're also financing equipment, taking a working-capital line, or carrying existing obligations, the underwriter sums total debt service. Borrowers often calculate coverage against just the big acquisition loan and forget the rest.
They may add a notional payment for the seller note. If part of your purchase is seller-financed, that payment counts too, even if it's on soft terms.
Put the rebuilt numerator over the rebuilt denominator and you get the underwriter's DSCR — which is frequently a good deal lower than the one the borrower walked in expecting. The gap between the DSCR a buyer calculates and the DSCR the lender calculates is the single most common reason acquisition borrowers are surprised by their terms.
So What Do You Actually Need?
For a stable, established practice with clean financials, plan for the underwriter to want to see their rebuilt DSCR clear 1.20x comfortably — which in practice means your own pre-adjustment numbers should show meaningfully more cushion than that, because the adjustments will eat into it. If your raw numbers only just hit 1.20x, the normalized version will likely fall short.
The nuances around the 1.20x line:
Stronger files get more flexibility. A borrower with strong personal credit, relevant clinical and ownership experience, a meaningful equity injection, and additional collateral may get approved closer to the line, because the DSCR cushion isn't the lender's only protection. The ratio is one input among several.
Weaker files need more cushion. A first-time owner, a thin equity contribution, a practice with revenue concentration or an aging patient base — these push the underwriter to want more coverage, not less, to offset the other risks. The same 1.30x deal can be an easy approval for one borrower and a decline for another.
Specialty and stability matter. Lenders are more comfortable with predictable, recurring-revenue practices than with volatile or highly owner-dependent ones. A practice whose revenue obviously walks out the door with the departing owner will face a tougher coverage test regardless of the headline number.
How This Plays Out Differently by Practice Type
The 1.20x principle is universal, but the path to clearing it varies.
For higher-overhead, equipment-intensive practices — dental, certain medical and surgical specialties — the debt loads are larger and the replacement-clinician salaries the underwriter subtracts are high, so the normalized income can drop sharply. These deals need genuinely strong underlying earnings to clear coverage after adjustments, and the equipment financing stacked on top of the acquisition loan makes the denominator heavier.
For lower-overhead, practitioner-driven practices — mental health, counseling, some allied health — the owner-dependence question dominates. The underwriter's central worry is whether the revenue survives the owner's departure. If the practice is one clinician's personal book, the coverage test will be applied harshly because the income the DSCR rests on is the most likely to evaporate.
For multi-provider practices of any specialty, the picture is usually friendlier: less of the income depends on the departing owner, the replacement-salary adjustment is proportionally smaller, and the revenue base is more durable. These tend to clear coverage more easily, which is part of why they command stronger valuations.
The Honest Frame for Buyers
The 1.20x number isn't wrong, but memorizing it won't help you. What helps is understanding that the underwriter rebuilds both halves of the ratio before they calculate it — normalizing owner pay, rejecting weak add-backs, using conservative revenue, stressing the rate, and counting all the debt. Your job, before you ever submit, is to run the same rebuild on yourself: subtract a real clinician salary, be honest about which add-backs are defensible, use trailing revenue, and stress the rate. If the deal clears 1.20x after you've done the underwriter's work for them, you have a financeable acquisition. If it only clears before those adjustments, you have a conversation coming that you'd rather have with yourself than with a declining lender.
The borrowers who get clean approvals are almost never the ones with the highest headline DSCR. They're the ones who walked in having already calculated the number the way the underwriter would.
The Clinic Financial Dashboard calculates your DSCR the way a lender frames it — operating income against debt service, with the lender thresholds (1.20x minimum, 1.50x comfortable, 2.0x strong) called out directly. Enter your numbers to see where you'd sit before you ever submit a file. Separate Canadian and US models.
Disclaimer: Lending standards described are general and vary by lender, market, and borrower. Thresholds like 1.20x are common reference points, not guarantees of approval or decline. KlinDeck is not a lender, broker, or financial advisor. Content is educational only. Consult your commercial banker and accountant for your situation.