Valuing & Financing a

Business Acquisition
Key Points to Understand Before
Closing the Deal
Aaron Paul, President
Acquisition Finders
2015

Whos Buying Small &

Mid-Sized Businesses Today?

Strategic Buyers / Competitors

Private Equity Firms
Family Offices
Individual Buyers
Management Team / Employees
Valuation ranges are determined
by the type of buyer.

Strategic Buyer/Competitor
Typically another company or competitor.
Usually part of an acquire to grow strategy.
Your business fulfills a specific need either with
ancillary product or geographic reach.
Your business might command a higher price if
the synergies are right.
Buyer might not retain employees, facilities, etc.

Private Equity Firm

Investment vehicle for high net worth individuals
and institutional investors.
Seek to maximize growth of portfolio companies
over 5-7 years before selling portfolio.
Strong financial resources and corporate acumen.
Typically retain key employees and ownership for
extended period of time.
May be too focused on the financials at the
expense of operations.

Family Office/Search Fund Buyers

Family office and search funds are similar to PE
firms.
Tend to hold investments longer, with less
oversight.
Sales multiples typically less than PE/Strategic
buyers.
Search funds are typically individuals, backed by a
team of investors.
Search funds are usually run by younger, MBA
graduates.

Management Team/Employees
Some PE firms will partner with management to
buy a company.
Could sell to employees using an ESOP.
Leveraged ESOPs give an owner an opportunity to
cash out of some or all of his/her ownership.
Business finances the buyout.
Can take some time to set up and administer.

Individual Buyer
For businesses with a value of less than $5,000,000 this is
your most likely buyer.
Typically outplaced corporate executive in their 40s or
50s.
Use SBA or other financing options to buy your business.
Seller financing is also a key component.
Sales price multiples are typically lower than other
groups of buyers.
Make up 80% of the active business buyers in the
marketplace.

Business Valuation

Owners Earnings are the best way

to measure the success and value of
a business.
- Warren Buffett

Business Valuation
1. Cash flow is the determining factor!
2. Determine true owner benefit (Key component)
3. Consider trends, competition, etc.

4. Determine your multiplier.

Documents & Other Info

Required
At a Minimum:
1.
2.
3.
4.
5.
6.
7.
8.

Last 3 Years of Internal/CPA Profit & Loss and Balance Sheets.

Last 3 Years of Tax Returns.
Capital Expense Requirements.
Cash Flow Conversion Cycle.
Fixed Asset Breakdown.
Understand Owner Comp and Perks.
Is Depreciation really a non-cash expense?
Multiple conversations with owner.

Guidelines for Valuing Businesses

Finding Net Owner Benefit

ADD BACK
1.
2.
3.
4.
5.

Net Profit
Owner Compensation (salary, dividends, etc.)
Depreciation/Interest/Amortization
Fringe Personal Benefits (car, insurance, cell phone, etc.)
One Time Expenditures last years hail damage

SUBTRACT
6. Capital Expenditures understand the trends & needs
Add #s 1 5, subtract #6 to get Total Owner Benefit

Valuation Ranges
If a business has a net cash flow of over $5,000,000, sales
price multiples will typically be in the 5x-7x range.
If a business has a net cash flow of $1,000,000 $5,000,000, sales price multiples will likely be in the 3x5x range.
If a business has cash flows of $500,000 to $1,000,000,
multiples will likely be in the 2x-4x range.
If a business has cash flows less than $500,000, typically
multiples will be 2x-3x range.
A strategic buyer will always be willing to pay more than
you as an individual.

Value Drivers
Factors in Determining Key Multiplier
Industry Trend
Type of industry
Barrier to Entry
Competition
Defensible Market Niche
Historical Financial Trends
Revenue Growth Potential
Customer Base
Internal Operations Defined processes
Employees
Years in Existence
Seasonality

Financing Options
Cash or Personal Finances (stock & securities)
401K/IRA Retirement Plans penalty free
Bank Loans (conventional asset-based)
Seller Financing
Small Business Administration Loans
Most attractive lending environment in years.

Private Investors

The SBA

Banks use the SBA guarantees to help collateralize your

loan.
In the current credit environment, acquisition financing is
an attractive loan for a bank to make.
If you have a down payment of 10% to 20%, relevant
industry experience and a good price negotiated, you can
typically find a financing partner.
SBA lenders like to see some element of seller financing,
usually 10% to 20%
The SBA will finance up to $5,000,000 of a transaction. At a
3.5x multiple, that would be a business with a cash flow of
$1,500,000.
No need to pre-qualify, you must have a deal in hand.

The Banks & You

Banks will still have their own policies in regards to the

acquisition loan, regardless of SBA rules.
Personal liquidity matters. Banks want to make sure that
you have cash available after closing for your lifestyle.
Will require a 3rd party appraisal on the business as well as
fixed equipment (maybe).
Make sure the seller note qualifies as equity.
Seller cannot remain under a contract for more than 1 year
after closing.
Must have proof of your equity injection capital.
Your credit score is important.

What Can You Afford?

What do you need in salary from the business?

Consider your lifestyle requirements

What was your salary at your previous job?
Remember the tax benefits of owning your own company

Does the business qualify for SBA financing?

Certain industries are not allowed

Do you have relevant industry experience?
What is the available cash flow after your salary to cover the
debt service?
The debt service coverage ratio should be at least 1.3.

What is your down payment?

You will need at a 10% to 20% down payment in the current

credit environment.

What Can You Afford? An Example

A Simple Formula
Salary X 2 = Cash Flow Needed for Personal and Debt Service
Cash Flow X 3 = Amount Paid for the Business
15% of the Amount Paid for the Business = Your Down Payment

This basic formula will help you make sure that the business can
pay you and pay off any debt you take on to purchase the
business.

To connect with Aaron Paul for more

information, please submit your name and
email through the following link:
http://www.execunet.com/events?id=10342