Payback period is the time it takes to recover your original investment. If you are buying a small business, that’s your down payment money.
You can use ValuAdder Deal Check tool to factor in your payback period.
1. Your purchase price and terms
Enter the purchase price and terms you have in mind. Next, specify the compensation you need for yourself. Don’t forget to enter the “capital expenses” needed to keep the business running smoothly.
2. Return on down payment
Now, let’s say you want to get your down payment back within 4 years after the business purchase. Enter 25% into the “Return on Downpayment” input on the Deal Check Tab. This tells ValuAdder that you want to recover your downpayment in exactly 4 years after you close the deal.
3. Does the business throw off enough cash flow?
Click on the Calculate button to see the cash flow required from the business.
If the actual business cash flow falls short, you can consider a few changes:
- Negotiate a lower purchase price. This, of course, reduces the down payment and cash flow required from the business.
- Lower the down payment amount. You can recover a smaller investment more quickly. Watch the debt service as you use more of “other people’s money”.
- Increase the term of the seller or bank loans. Debt service has a major impact on the business cash flow. Generally, the longer the term, the less cash flow is needed to service it.
Caution: You and your business must be paid!
Don’t reduce the amount of capital expenses, working capital or your compensation level. You will need to buy new assets and replace old ones as they wear out. And you must pay yourself to meet your own expenses.
Keep the ValuAdder AutocalculateTM on – it will save you a lot of time as you fine-tune your business purchase terms.More on Valuation