Unless you expect a buyer to ride up on a white horse and write a check for your business, this is the valuation that I strongly suggest you take into consideration. It just makes sense:
- Determine your current cash flows for the business – that is, what you are able to keep at the end of every month or year.
- Estimate the loan payments, including interest, that a buyer will need to make in order to buy your business.
- Subtract the loan payments from your current cash flow.
- Divide the net of this calculation by the sales price of your business.
Generally speaking, if this percentage is below 15%, the buyer is probably not going to receive a loan.
Let’s look at an example with the following assumptions:
- A business generates $40,000 in cash flows annually
- A downpayment of $40,000 will be made.
- The interest rate for business loans is 10%
- The loan is to be paid over 36 months.
| Returns on Investment After Servicing Loan | ||||||||
| Sales Price |
Down Payment | Yearly Cash Flow |
Loan Amount | Yearly Loan Pmts |
Cash flow Less Loan Pmts |
Return on Investment |
Approval from Bank? |
|
| $ | 100,000 | 40,000 | 40,000 | 60,000 | 23,232 | 16,768 | 16.77% | Yes |
| $ | 110,000 | 40,000 | 40,000 | 70,000 | 27,104 | 12,896 | 11.72% | No |
As you see from the above, $10,000 can make the difference between a successful sale and a failure and 100% of $100,000 is a heck of a lot better than 0% of $110,000. You might also note that the amount of the downpayment, the interest rate, and the payback period for the loan may significantly impact the appropriate sales price, as well as any collateral the buyer may pledge for the loan.