You may have heard that business selling price is just one part of the business purchase or sale decision. The terms of sale and business financial requirements are at least as important to a successful deal.
Business acquisition financing: debt and equity
Small business acquisitions are financed using some blend of debt and equity capital, known as the deal structure. While all-cash deals do occur, it is very common to have some form of debt financing. And seller financing is by far the most important element of debt financing available in a small business purchase.
Both business purchase price and terms matter!
Needless to say, the amount and terms of debt financing make a big difference to how successful a business purchase is. Generous financing terms reduce the cash flow drain during the important business ownership transition period. This is very important because the business earnings may fluctuate early on as the new business ownership takes control and works hard to retain its relationships with customers and vendors.
Don’t overlook your working capital needs!
In addition to the deal terms, it is very important to provide the business with adequate short and long-term financial resources. Since most small business sales are structured as asset transactions, the new ownership has to provide sufficient working capital to cover the business short term financial needs. This addition to the business purchase price may be quite significant!
Your business needs capital investment to keep growing
Equally important is the need for the long-term capital expenditures. All businesses require investments in key assets to continue running smoothly. You can review the historic Statement of Cash Flows to see what type of property and equipment re-investment is required.
Don’t forget to pay yourself!
Last, but not least, the new ownership must provide for adequate compensation for themselves if they plan to work in the business. And any savvy business buyer would expect a good return on the down payment made to purchase the business.
ValuAdder Deal Check helps you keep it all straight
ValuAdder Deal Check tool lets you get through the critical task of picking the selling price and terms that make the business acquisition work for you. You can account for every element of the business acquisition deal, and instantly calculate the business cash flow required to make the deal work.
No matter what the proposed terms of the deal are, Deal Check lets you see what cash flow is needed from the business. You can use the tool to vary the terms until they match your expectations and the business cash flow.
Deal Check is an excellent tool to construct business purchase offers, review counter-offers and negotiate the terms that make financial sense – before you sign the purchase agreement!