Vancouver Board of Trade: Sounding Board, March 2015

Four Points to Consider When Buying or Selling a Business

A seller needs to know what a person will be looking for when they’re considering buying a business — namely cash flow, cash flow, cash flow and growth. Here’s why!
First of all, the cash flow of the business should be able to provide a living wage for the time that one invests in the business. This will be dependent on the business, the industry, a buyer’s expectation and type of buyer — whether its strategic, synergistic, or Main Street.

Secondly, the cash flow of a business should be able to support a reasonable level of debt service, when the investment is leveraged. Unless it’s relatively small, it’s rare for a business to sell for all cash. The earnings of the business need to support the debt service. If not, you simply won’t be able to service the debt as the leveraged amount may be too high for the business to support. Alternatively, the cash flow may be too little, or could have no earnings at all. In this case, the highest value of the business may be no more than the market value of the assets.

Third, the cash flow of the business should be able to provide a reasonable return of invested capital, thereby reaping what you sow. Astute buyers will further understand the power of leverage, and in many cases a reasonable amount of leverage is efficient use of one’s money. The expected yield in such investment should be reflective of the risk.

Typically such yield would command a return on invested capital somewhere between 15 and 35 per cent — perhaps even 40 per cent where there is high risk And finally, the business should possess growth opportunity. As the old adage goes, “What is not growing is dying.” Anything short of buying growth opportunity is a tough sell to any reasonable and educated buyer.