The businesses we sell are priced on a realistic market value of the assets and liabilities and the true earning capacity of the business. As a buyer, you need to be realistic about what you can afford to pay.
After all is said and done, what you will be buying is the ability of the business to produce cash. Will it be sufficient to service your debt to buy the business, support your lifestyle and provide a return on your invested capital? Can the earnings be increased?
Will the earnings meet your needs?
Here’s an example. Let’s say to support your lifestyle you need to make $75,000 annually. Will a small business with the selling price of $300,000 and business earnings of $150,000 meet those needs? You can provide $150,000 for a down payment and the seller is loaning you the remaining $150,000 of the purchase price.
Selling Price of the business $300,000
Business earnings (Seller’s Discretionary Earnings) $150,000
Down payment $150,000
Earnings/Salary required $75,000
Seller’s Note* $150,000 with financing for three years @6%
Annual payments for seller loan $54,677 (the debt, three years @ 6%)
Business earnings $150,000 – debt payments $54,677 = $95,323 to you the new owner
*Most of our business buyers depend on sellers taking back a percentage of the purchase price in the form of a loan. Through this financing arrangement, known as a seller’s note, the buyer agrees to pay back the funds over time, with interest. The buyer realizes lower risk, better terms and a greater commitment of the seller to ensure his or her success.
- A down payment representing some 30 to 50 per cent of the purchase price is the norm.
- You will need working capital to keep the business going. Additional inventory may be a priority, as levels tend to be lower when the business is purchased.
- Don’t overstretch yourself to your financial capacity. Leave sufficient rainy day and transition capital to ensure a cushion of safety.
Sunbelt offices have developed strong relationships with banks, investment bankers, private equity firms, venture capital firms and other specialized lenders. Our network has 30 years of experience arranging financing for small to medium-sized businesses.
We will guide you through the process of determining the size of business that you can afford to buy, helping you understand the real value in the businesses you look at, and securing the right price and terms. Because we negotiate so many business purchases, we have a wide range of strategies and creative approaches that will serve you well.
Get more information on determining what you can afford:
Top 10 Tips for Buying the Right Business for the Right Price and Terms