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
Covenant Family Wealth Advisors' certified financial advisors and business succession planning experts help guide families through the technical and emotional aspects of managing wealth, estate planning and business succession. Our experienced financial management team uses a Christian perspective that is rarely found in traditional financial planning, and we work closely with you to develop a personal Holistic Stewardship Plan that encompasses financial planning, estate planning, family business transition and philanthropy.
In recent days, it has become increasingly evident that we are experiencing an unprecedented event around the world. The speed at which our lives have been turned upside down is breathtaking. At Covenant, we are doing our best to continue serving our clients while taking precautions to stay safe and reduce the risk of further spread of the virus. We value each of you and count it a privilege to serve you. Amidst this most trying time, we are available to discuss any concerns you may have pertaining to your finances or business. Please do not hesitate to contact us. Although the challenges are significant, we are confident we will all get through this and that brighter days are ahead.
May we each be wise, discerning and quick to help those who need it.
The Covenant Team