How Much Can You Afford to Buy a Business
Determining how much you can afford to spend on buying a business needs to be considered upfront. Be realistic. Understand, in most cases, you’ll need to put 30 to 50 per cent of the purchase price as a down payment. Beyond that, you will need sufficient operating capital to run the business; profits to service the debt used to buy the business, support your lifestyle and provide a return on your invested capital.
What do you need to support your lifestyle?
Let’s assume that you need to earn $120,000 a year to support your current lifestyle. You’ve budgeted $750,000 to buy a business. Assuming that you want to put down 30%, will a business selling for $2,500,000 with business earnings of $625,000 meet your needs?
- Selling Price of the business: $2,500,000
- Business earnings (EBITDA) $625,000
- Down payment: $750,000
- Earnings/Salary required: $120,000
- Seller’s Note* $500,000 with financing for five years @ 6%
- Annual payments for seller loan $115,800 (the debt, five years @ 6%)
- Bank loan $1,250,000 with financing for five years @ 5.5%
- Annual payments for bank loan $286,000 (the debt, five years @ 5.5%)
Business earnings $625,000 – debt payments of $115,800 and $286,000 = $223,200 to you the new owner
*The majority of our buyers rely on the business seller taking back a percentage of the purchase price in the form of a loan (seller’s note). Through this financing arrangement you would agree to pay back the loan over time, with interest. You realize lower risk, better terms as well as a greater commitment from the seller to ensure your success.
- Don’t overstretch yourself. You will need working capital to keep the business going.
- With businesses that rely on inventory, levels tend to be low when someone is selling their business, so additional inventory may be a priority.
- Leave sufficient capital for rainy days and transition to ensure a cushion of safety.
Over the years, SB M&A has 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 utilizing a wide range of strategies and creative approaches that will serve you well.
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.
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