Buyers Affordability
Determine What You Can Afford
Be Realistic About Your Budget
Businesses are priced based on their true earning capacity and the market value of their assets and liabilities. As a buyer, it’s essential to be realistic about what you can afford to pay—and what the business can deliver in return.
Ultimately, when you buy a business, you are buying its ability to generate cash flow. That cash flow must be sufficient to:
· Cover the debt you take on to purchase the business.
· Support your lifestyle and financial needs.
· Provide a return on your invested capital.
Key Questions to Ask Yourself
A Practical Example
Compared to start-ups, buying an existing business significantly increases your likelihood of long-term success. Statistics show:
Let’s consider the following example.
Suppose you need $75,000 annually to support your lifestyle.
You are considering a business priced at $300,000.
It has Seller’s Discretionary Earnings (SDE) of $150,000.
Your can pay $150,000 at closing.
If the Seller agrees to finance (“seller’s note”) the remaining $150,000 at 6% interest over 3 years, your annual loan payments will be $54,677.
Now what does this mean for you?
If you subtract the $54,677 (annual loan payments) from the $150,000 (SDE), you are left with $95,323 each year, for the next three years that is available to you as the new owner.
In this scenario, you would have an additional $20,000 to reinvest in the business each year, to grow it.
This example illustrates how earnings, debt obligations, and personal needs must be carefully balanced before making an offer.
Understanding Seller Financing
Most buyers rely on the banks and the seller to finance the acquisition. The seller’s portion is known as a seller’s note or vendor take back (VTB), this arrangement reduces the risk for the buyer and the bank, creates more favorable terms, and gives the seller added incentive to support a successful transition.
There are a few different ways that a VTB can be structured:
* They can be set up as a regular loan payment over a defined period of time.
* There can also be an earn out component. An earnout is a part of the deal when a company is sold where the seller can receive additional payments in the future, but only if the business achieves certain pre-agreed performance goals after the sale.
* You can also include balloon payments. A balloon payment is a single, lump-sum payment that is much larger than the regular monthly payments, due at the very end of a loan’s term. As you can guess, the name comes from the idea that the final payment “balloons” up in size.
Important Considerations
Down Payment
Down Payment: You should have access to at least 20%–50% of the purchase price in liquid assets, prior to close. The more you have access to, the better position you are in to negotiate any financing terms from the bank and the seller.
Working Capital
Additional funds may be needed for accounts payable, inventory, staffing, operational expenses and/or improvements.
Safety Net
Avoid overstretching your finances— in addition to your closing costs, leave reserves for unexpected costs and transition capital.
Determine What You Can Afford
How Trillium Helps Buyers
At Trillium Business Brokerage, we leverage decades of experience and strong relationships with lenders—banks, private equity groups, and specialized financing partners—to help buyers secure the right deal.
Our role is to:
· Guide you in determining the size of business you can realistically afford.
· Help you evaluate the true value of businesses you consider.
· Negotiate favorable terms that balance risk and reward.
· Provide creative strategies for structuring deals that meet your goals.
Let’s Connect and Discuss Your Business Needs Today!
Contact us now for personalized guidance on buying, selling, or valuing your business.
Take the Next Step
Buying a business is about more than just price, it’s about making sure the numbers align with your lifestyle, your financial capacity, and your long-term goals.
Contact Trillium today for a confidential consultation, and let us help you determine what you can afford—and how to secure the right business on the right terms.