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  Home > Blog > What Will Your Small To Mid-Sized Business Sell For?

Blog Post What Will Your Small To Mid-Sized Business Sell For?

Contributor: Blair Sibley at 607-301-0967 - Log In To Message/Email This Contributor

Part 1:

The simple answer: A buyer will only pay what they can afford to pay. In making that determination, a buyer will look at the operational cash flow generated by the business. Once that number is confidently determined (always a challenge in loose accounting SMEs), a potential buyer first figures out what they will have to pay earn in order to maintain and/or increase the cost of their lifestyle. After that, because few buyers can write a check for the entire amount of the purchase, the debt service on the financing for the purchase must be covered. Last, a sophisticated buyer will provide for a return on the capital invested and fund a contingency.

Once this math is done, a buyer who can’t afford to pay for these items based on a certain purchase price, will either pay less or shift the risk to the seller via the terms of the deal. This is why when selling SME (small/mid-sized enterprise), you must put yourself in the other party’s shoes to think through this dynamic before setting your asking price.

This should bring home this point: Ensuring the accounting will show a strong Seller’s Discretionary Income is vital to obtaining the highest price for your SME. Taking cash out tax free hurts you in the long run as a buyer can’t confirm that income, hence a lower purchase price.

 

Part 2:

The quick answer is: Whatever the government says your business is worth. Why? Simply stated, most purchases of small/medium businesses are financed through loans guaranteed by the Small Business Administration. Generally speaking, the guidelines for banks extending SBA-guaranteed loans require the seller to pay 10% of the purchase price with the banks financing the balance of 90%. Obviously, banks don’t give away money; the financials of the business being bought must support the repayment of the loan.

Assuming the other underwriting requirements are able to be met, the math looks like this to a bank considering a loan for a business selling for $300,000. The business would need to be generating $134,570 of Seller’s Discretionary Earnings in order to qualify for the loan:

Purchase Price: $300,000 

Bank Closing Costs (5% of PP): $15,000 

LOC/Working Capital (5% of PP): $15,000 

Gross Purchase Price: $330,000

Buyer Equity (10% of GPP): $33,000 

 

SBA Borrowed Funds: $297,000 

Debt Service (10 year amortization @ 7.25%): $39,884/year

Return on Buyer Equity (15%): $4,950 

Compensation - Buyer: $60,000 

Growth Investment (5% of Revenue): $22,956 

Net Cash Flow: $6,780 

Seller’s Discretionary Earnings: $134,570 

As the SDE figures rises or falls, the amount available for financing likewise rises and falls. In this way, the SBA in large measure determines the selling price for a business.

Key Words: sell a business, sell your business, sell my business, selling a business, valuation, business valuation, business value, value, selling price, asking price, pricing your business, valuing a business, valuing your business, cash flow, sde, discretionary income, sme, buying a business, adjusted net income, income, earnings, sba loans, sba loan, loans, financing, business purchase financing, blair sibley



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Contact: Blair Sibley at 607-301-0967   Log In To Message/Email This Contributor
Profile: Born and raised in Rochester, New York, Blair received his law degree in 1981 from Albany Law School. Over the course of the next four decades, Blair worked as a criminal prosecutor in Rochester, then for a large New York law firm in New York and Miami before starting his own solo legal practice.
Key Words: blair sibley, klassen ingalls, business broker, wholesale, plumbing, supplier, storage, marketing, distributor, distribution, market, supermarket, construction, hardware, swimwear, apparel, clothing, dry cleaners, day care, equipment, framing, staffing, fast food, hudson river valley, monroe, wayne, albany, jefferson, buffalo, erie, boston, worcester, rochester
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