A good lens through which to evaluate the credibility of a potential business purchaser is that of the commercial lender that would finance such a purchase.
There are three main areas of evaluation used by many lenders:
Management and Governance
Strong business management is often the most heavily weighted criteria. Regardless of the quality of the assets/business being purchased, or the previous success track of the business, good management is required to ensure the business continues generating cash flow to repay the loan.
Examples of criteria for this area include:
Cash Flow and Profitability
The business must have a track record of producing the cash flow necessary to not only service the debt repayment but also to provide for the operational and growth needs of the business and income/returns for the owner.
Lenders will look to both the business and the borrower to provide the underlying security to support the loan. Should the borrower be unable to meet loan repayment obligations from cash flow, other assets will need to be liquidated to resolve the remaining loan balance.
Other Things to Consider Before Purchasing a Business
Before purchasing a business, one must consider the real impact on their lives and how well the ownership scenario being considered aligns with his/her personal goals and lifestyle preferences.
Purchase Financing Example
Purchase price: $10 million
Purchase price consists of:
The typical commercial lender will finance at rates something like this:
So the commercial lender may finance up to $5.75 million in this case leaving the purchaser to come up with the remaining $4.25 million.
To review a Business Purchase Financing Example, DOWNLOAD FULL PDF HERE
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