It is a simple concept, but it is often forgotten. A buyer will only pay what they can afford.
When selling/buying a small business, affordability is generally determined based on the operational cash flow generated by the business. Out of this cash flow, a new owner will have to pay him/herself, pay debt service, provide for a return on capital, fund a contingency, and invest in near-term growth initiates. If a buyer can’t afford to pay for these items based on a certain purchase price, then they will either pay less or shift risk to the seller via the terms of the deal.
So, if you are selling/buyer a small business, you must put yourself in the other party’s shoes to think through this dynamic.
Arthur Kaempffe is the President of Klassen Ingalls. He has a broad skill set including finance, marketing and sales, mergers and acquisitions, operations management, and organizational development. He has owned, bought, sold, and built businesses. Arthur is committed to maintaining the client-centric approach that differentiates Klassen Ingalls in the business brokerage/intermediary marketplace. Read more about the people at Klassen Ingalls.