Scenarios & sensitivity

A deal that only works in the base case is not a deal. See what happens when revenue falls, margins compress, or rates move against you.

Breaks at
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revenue decline

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Base case

Live
$
$
$
$
$
Structure
15%
10%
%
Sensitivity grid
Columns are always revenue change.

Five scenarios

Same deal, different world
ScenarioRevenueSDEDSCR Cash flowCash-on-cash5-yr IRRScoreOutcome

Sensitivity grid

Coverage as revenue falls

DSCR against the 1.25× floor
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Why stress-testing matters more than the base case

Every acquisition model looks good in the base case — that is what makes it the base case. The purpose of scenario analysis is to find the point at which the deal stops working and then ask, honestly, how likely that point is. A business with 40% of revenue in one contract and a 6% revenue cushion is not a 62-score deal; it is a coin flip wearing a spreadsheet.

The number that matters: revenue cushion

The revenue cushion is how far revenue can fall before cash flow no longer covers debt service. Above 25% you have genuine resilience. Between 10% and 25% you need a reason to believe revenue is stable. Below 10%, a single lost customer or one soft quarter puts you in default on a loan personally guaranteed against your house.

Revenue cushion = (CFADS − Debt service) ÷ (SDE ÷ Revenue) ÷ Revenue

What actually goes wrong after a purchase

  • Customers leave with the seller. Relationships that were never institutional walk out the door at closing.
  • Add-backs were not real. The "one-time" expenses recur, and SDE was never what the listing claimed.
  • Key staff resign. Ownership changes are the moment people reconsider, and replacing a lead technician costs both money and revenue.
  • Working capital was underestimated. Receivables lag, payables come due, and the buyer funds the gap from personal savings.
  • Margins compress. The seller's supplier pricing, informal labor arrangements, or deferred maintenance do not survive the handover.

This is why the downside scenarios here reduce margin as well as revenue. A shock rarely arrives alone.

How to read the sensitivity grid

Each cell is the deal under two simultaneous changes. Green cells clear comfortably, amber are marginal, red fail. What you are looking for is not the best cell — it is the shape of the red region. A deal where red only appears in the far corner is robust. A deal where red creeps into cells one step from the base case is a deal that needs a lower price or a different structure before you sign anything.

How severe should my downside case be?
Model at least a 20–25% revenue decline with a margin compression of 2–3 points. If the business has customer concentration above 25%, model losing the largest customer outright and see what remains.
What DSCR should the downside case still hold?
Ideally above 1.00 — meaning even in a bad year the business pays its own debt without your savings. If the downside case drops below 1.00, know in advance how many months of reserves you would need to carry it.
Should I model an interest rate increase?
Yes, if the loan is variable. Most SBA 7(a) loans float over the prime rate, so a 2–3 point move is a realistic test, and the grid includes rate as an axis for exactly that reason.

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Estimates for educational purposes only, not financial, tax, or legal advice.