By Lewis Floyd, Sr. Associate, W.B. Grimes & Co, (850-532-9466) lfloydmedia@gmail.com
Calculating Your Purchase Price
From the sellers view, the value of their publication(s) is usually not as high as they would like; the industry use to use a multiple times revenue, now it is mostly a multiple of cash flow which is often less than one times revenue. Regardless of how a buyer and seller come to terms, even if the value seems to be there, there is one more factor a buyer should consider – can this business repay my investment in a timely manner or make loan payments – and still provide me with an income?
From the buyers view this is the most important question they should ask before committing to the purchase. Depending on the type loan, the security of a loan, or a buyers return on investment needs, the most typical time periods are 5, 8, and 10 years (note: if real estate is involved the terms may be longer, or at least the repayment terms for the real estate normally are longer, 15 to 20 years)
The calculation I use as a business broker to validate a sales price can be used to comfort a buyer with the probable payback and income they should expect.
Let’s take an example: The current revenue is $950,000
The current cash flow is $200,000
First is determine a price – assume the multiple is 4.5 times cash flow which is $900,000.
Using the $900,000 as a return on investment, you can consider the following:
| Purchase Price | 900000 | 900000 | 900000 |
| Investment recovery years | 5 | 8 | 10 |
| Annual recovery amount | 180000 | 112500 | 90000 |
| 2016 Cash Flow | 220,000 | 220,000 | 220,000 |
| Balance funds for Buyer | 40,000 | 107,500 | 130,000 |
Using the price determined by the seller, the buyer does not have a lot left, so perhaps the buyer will make a counter offer of $700,000:
| Purchase Price | 700000 | 700000 | 700000 |
| Investment recovery years | 5 | 8 | 10 |
| Annual recovery amount | 140000 | 87500 | 70000 |
| 2016 Cash Flow | 220,000 | 220,000 | 220,000 |
| Balance funds for Buyer | 80,000 | 132,500 | 150,000 |
The buyer may have other factors that allow them to make the higher offer, e.g. – they may be able to do a longer recovery time, or could see growth the seller has not accomplished, or synergies the seller has not acted on, which could allow for a higher price close to the sellers asking price.
If the investment recover amount is a loan for the purchase the buyer really needs to consider the funds left after paying the loan note – if they cannot live on the funds left they should not purchase it at that price. Just saying …
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