The Income Stream Coverage Test
A buyable business must cover four things — interest, your income, an operator, and working capital.
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 86%
Before buying, Sanchez tests whether the business's income stream can cover four things: the interest expense on the acquisition loan, the income the buyer wants to earn, an operator's salary so the buyer doesn't buy themselves a job, and working capital for surprises or growth. She insists you never buy an unprofitable business to start — the P&L must show profit, and it should match the tax return or the price gets cut so the tax return becomes your de-risked price. A full due-diligence file then examines where the risk sits, how many employees exist, and what assets are included.
Origin
A structured underwriting rule Sanchez uses on every acquisition and breaks down further in Main Street Millionaire.
Core principles
- 01You buy a business to make money, so it must throw off enough income to cover its obligations
- 02Never buy an unprofitable business to start
- 03Budget for an operator so you buy a business, not a job
- 04Keep working capital for when things go sideways or to grow
How to run it
- 1
Cover the loan interest
Confirm the income stream can service the interest expense on however you financed the purchase.
- 2
Cover your income
Ensure the business generates the amount of money you personally want to make from it.
- 3
Cover an operator's salary
Budget for a manager so you don't run the business yourself and end up buying a job instead of a business.
Watch out Skipping the operator line means you've bought yourself a job.
- 4
Cover working capital
Keep a buffer of extra money in case anything goes sideways or to fund growth.
- 5
Reconcile P&L to tax return
Verify the business is profitable per its P&L and that the financials match the tax return; if not, decrease the price so the tax return becomes your de-risked valuation.
Pro tip The tax return is the number the seller reported to the government — trust it over the pitch.
Watch out Buying an unprofitable business to start is 'asking for pain.'
In the wild
Sanchez names the four things an income stream must cover — interest, buyer income, operator salary, and working capital — as the test for whether a business is worth buying.
→ Buyers filter out businesses that can't support both a manager and a return.
Common mistakes
Buying an unprofitable business
Starting with an unprofitable business is asking for pain; the P&L must show profit before you buy.
Omitting the operator salary
Failing to budget for a manager means you've bought a job, not a business, and your time is trapped.
Is it for you?
Best for
Buyers evaluating whether a target's financials support a viable acquisition.
Not ideal for
Charity or turnaround plays where current profitability isn't expected.
From the transcript
“an income stream has to cover a few things it has to cover the interest expense on your loan ... your income ... some version…”
“we don't buy unprofitable businesses to start that is asking for pain”
From the episode
Codie Sanchez: How to Make Extraordinary Wealth Buying Boring Businesses
Codie Sanchez