The epidemic of corporate downsizing has made business ownership a more attractive proposition than ever before. As increasing number of prospective buyers embark on the process of becoming independent business owners, many voice a common concern: How do I finance the acquisition?
Buyer’s Personal Equity: In most small and mid-size business acquisitions this is a key element. Anywhere from 20% to 50% of capital needed to purchase a business comes from the buyer.
Seller Financing: One of the simplest and best ways to finance the acquisition of a business is to work closely with the seller. The terms offered by sellers are usually more flexible and more agreeable to the buyer than those from a third-party
• Seller financing command a higher selling price.
• Interest on the seller financed portion of the transaction can significantly add to the total proceeds received for the sale.
• Interest rates on seller notes are higher than money market or CD rank rates. Positive consequences compared to all cash sale (check with your tax professionals).
SBA Financing offers buyers attractive loan terms and interest rates while eliminating or reducing the need for the seller to carry a note. This means a lower down payment and lower debt service for the buyer, which translates into more net income for the buyer. Both of these factors make SBA financing attractive.
• Often reduces the amount needed for a seller note.
• Lowers down payment which increases the number of prospective buyers.
• Lower debt service creates
Valued Representation by your SEARCHWELL ADVISORS Intermediary will include exploring these and other types of favorable financing options available to you as a qualified buyer. During the buyer qualification process, SEARCHWELL ADVISORS will council you and help manage your expectations once an offer is accepted by the seller.
What Is My Business Worth?
There are many methods of pricing a business. The most commonly used are:
Cash Flow Method
A multiple of the annual cash flow (which we refer to as Discretionary Earnings or “DE”, or Earnings Before Interest and Taxes or “EBIT”). This multiple can vary widely depending on the business, the economy and the industry trend.
A combination of “Furniture, Fixtures and Equipment” (FF&E), the inventory and a multiple of Discretionary Earnings (DE).
Gross Sales Method
3 to 12-months gross sales; again depending on the business, the economy and the industry trend.
Comparable Sales / Market Method
This method compares sales of similar businesses and also the valuation multiples from these acquisitions. An adequate number of comparable companies is necessary to produce credible results.
Price is usually related to cash flow and varies with the financing terms agreed upon. Price will also depend on the type of business, the value of the assets, general attractiveness fo the business and future potential, among other factors. True market value is what a buyer agrees to pay and a seller agrees to accept (without undue pressure).
Pre-Tax Net Income
+ Owner’s Salary
+ Discretionary Expenses
+ Non-Cash Expenses (e.g. Amortization & Depreciation)
+ Interest Expense
+ Non-operating Expenses
+ Non-recurring Expenses
= Discretionary Earnings