Bruce, I want to buy this business

It’s throwing off $600,000 in SDE

Can you provide the financing for this transaction?

Well, Twitter world, do you think this will pencil out ?
So this buyer calls me and says can I go over a deal I’m interested in submitting an LOI

Of course, this is a routine part of my day to day activities.

Happy to do so. Before we speak, can you send over the following:
Ok, I am in receipt of the following:
1. CIM
2. Last 2 years corporate tax returns
3. Company literature/information
4. Your resume
5. Your PFS
6. Proposed Sources/Uses of funds
Now, let’s chat. So we do and discuss “why” this is the right one!

So now, let’s see if this pencils out:
So we have $600,000 in SDE, how real is that number and how much of it is “addbacks” for owner benefits. Is it meals & entertainment, auto expense, cell phone, insurance, payroll taxes, travel etc.

I’m not saying these are not a benefit, for sure they are, but understand:
These items listed are not “addbacks” for debt service coverage. WHY you ask? Because you as the new owner will absolutely take those same benefits. This is why people own a small business. How do I know?

Because I have been there, done that!
So now that $600,000 is down to let’s say $540,000 (subtracting 10% for the above which I think is fair) less a minimal salary of $100,000 for you, leaves us with $440,000 for debt service coverage.
So based on the $600,000 you offer a 4X multiple, so $2,400,000 purchase price. As a general rule, working capital is not included in these size businesses so for example, let’s just add $100,000. Then there are deal costs, closing costs and diligence fees and attorney fees.
So let’s add another $100,000 to cover these related costs, which puts our total project cost at $2,600,000. So how much equity is being injected, and the normal response is, drum role please 🥁, oh 10% or $260,000. Ok then, how much is the seller holding as a note?
Again, drum role please 🥁, oh 10% as well so $260,000. So the requested loan amount is $2,080,000. So the loan payments for 10 years at 10.00% today would be $27,487 a month. Ok, what about the seller note. So let’s say 6% for 5 years, after all, it’s only $260.000.
So the payments to the seller would be $5,026 a month.

So combined, total payments would be $32,513 a month.

So take $32,413 x 12 months = $390,156.

So your DSC would be $440,000/$390,156 or 1.12X
So here it comes:
“Congratulations you have structured a deal that does not work”

So recognize where we are at today. Just know that something has got to change:
Either 4x + multiples are not going to work with the old thought process of 80%, 10%, 10% structure, more equity needs to be injected, larger seller notes with better terms/conditions, perhaps internet only periods etc.
So Bruce, can you help me, no, because the noose is to tight around your neck.

But keep looking or re-trade the deal to make it work!

Hopefully this example helps clarify things for you and adds real value. If it does, please like, share and retweet. @sbabmarks
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