Evaluating the Feasibility of Acquiring a $1.9 Million Small Business
Are you contemplating the acquisition of a small business priced at $1.9 million? If so, you’re not alone—many aspiring entrepreneurs are eager to dive into the business world. Recently, I spotted a waste management firm in my vicinity that piqued my interest due to its solid revenues and long-term contracts. With the 2023 revenue reported at $1.9 million and a net income of $325,000 (after accounting for the owner’s salary), this opportunity looks appealing at first glance. The EBITDA for the same year stands at $390,000, and the business has seen a remarkable 15% growth in revenue over the last two years.
Before I proceed, I’m assessing my financial leeway, as I have about $300,000 in cash that I’m willing to invest. Given that I plan to run the business full-time, it’s crucial to ensure that my budget aligns with the purchase price and any associated costs.
Questions on the Table
1. Are My Financial Estimates on Point or Flawed?
I’ve outlined a potential budget aimed at closing the deal, but the figures appear to surpass my available funds. I’m keen on receiving feedback regarding the accuracy of my calculations, as well as insight into any discrepancies—whether I’m underestimating or overestimating costs.
2. Is a $1.725 Million Offer Justifiable?
Additionally, I considered making a formal offer of $1,725,000. Notably, I’ve learned that the seller has set a reserve price of $1.8 million. Would this offer be viewed as reasonable given the circumstances?
Breakdown of Estimated Costs
Here’s a breakdown of the financial commitments I foresee:
- Offer Amount: $1,725,000
- Down Payment (10%): $172,500 (assuming a Small Business Administration loan)
- Working Capital: $100,000 (for payroll, taxes, operational expenses, insurance, etc.)
- Escrow Fees (1%): $17,250
- Sales Tax (on Furniture, Fixtures, and Equipment): $48,000 (Based on an FFE estimate of $800,000 with a 6% state sales tax rate)
- Security Deposit for Leases: $20,000 (Approximately $10,000/month)
- Advisor Fees: $50,000 (For comprehensive due diligence)
Total Cash Required: $407,750
Breakdown of Advisor Fees:
I estimated the advisor fees as follows:
- Legal Fees (1%): $17,000 (Covering the drafting of purchase agreements and legal due diligence)
- CFO/Accountant Services: $10,000 (To conduct thorough financial due diligence)
- Operations Expert: $10,000 (For inspecting up to eight vehicles and relevant equipment)
- Insurance Specialist: $3,000 (To evaluate insurance coverage for the business and fleet)
- Environmental Consultant: $5,000 (To ensure compliance with waste management regulations)
- HR Specialist: $5,000 (For reviewing employee contracts and assessing legal obligations as an employer)
Concluding Thoughts
As I navigate this potential investment, I’m eager to analyze my financial plan in detail and gauge whether my offer stands a good chance against the seller’s reserve. Engaging with knowledgeable advisors and seasoned entrepreneurs will be invaluable as I take these next steps. The world of business acquisition is both thrilling and complex, and a thorough understanding of the numbers can make all the difference. Your insights would be greatly appreciated!
2 Comments
When considering the purchase of a $1.9 million small business, particularly one with promising revenue and growth prospects like your potential waste management venture, it’s vital to conduct a thorough financial assessment that includes both direct acquisition costs and ongoing operational considerations. Let’s break down your inquiries and offer specific insights.
Question 1: Review of Your Numbers
Your budget breakdown is commendable in its detail, but let’s analyze each component:
Down Payment Amount: At $172,500 (10% of your offer), this seems reasonable for an SBA loan, which typically requires a down payment in the 10-20% range. Confirm the specific SBA requirements to ensure compliance, as different lenders can vary.
Working Capital: The $100,000 allocation for working capital is a crucial aspect, particularly for payroll and operational expenses. Make sure to account for any seasonal fluctuations in revenue that might require additional buffer funds, especially if the business has cyclical cash flow patterns.
Escrow Fees: At 1% for the escrow fee, $17,250 seems accurate. Ensure that you clarify what services are covered in this fee with your escrow agency, as some may charge additional fees.
Sales Tax on FFE: Your estimate of $48,000 based on a 6% state sales tax and $800K in Furniture, Fixtures, and Equipment (FFE) appears valid. However, confirm whether the FFE valuation is correct and if certain assets may be exempt from sales tax depending on state regulations.
Sec Deposit for Leases: The $20,000 estimate is reasonable, but it’s wise to communicate with the landlord to clarify if the deposit aligns with lease terms or if a different structure is proposed.
Advisor Fees: Your breakdown totals $50,000, which is a comprehensive estimate for due diligence. Ensure you have a clear understanding of what each advisor delivers in terms of services. While your estimates are valid, be prepared for potential fluctuations in actual fees. It’s common for legal fees to exceed initial estimates if complications arise during due diligence or negotiations.
Total Cash Needed Calculation
The total cash needed of $407,750 presents a significant commitment compared to your available $300,000 cash. This results in a potential shortfall of $107,750. One way to bridge this gap is to explore financing options for working capital or increasing your down payment and applying for a larger SBA loan. It may also be worth negotiating with the seller on the price or terms, considering your calculated total cost exceeds your budget.
Question 2: Offer Amount Assessment
Your proposed offer of $1,725,000 seems reasonable, especially given that the seller’s reserve is $1.8M. Your offer is slightly below this figure, which gives you room to negotiate. Here are a few things to consider:
Market Comparison: Evaluate similar businesses’ sale prices, particularly within your area. A business appraiser or broker can help provide an industry comparison.
Growth Potential: Given the business has shown consistent revenue growth (15% over the past two years), you might leverage this in negotiations to justify your offer. Emphasizing potential upsides can either strengthen your negotiating position or justify your proposed purchase price.
Seller’s Motivation: Understanding why the seller is moving on can help with your negotiation. If they are eager to sell quickly or are facing operational challenges, you may have more room to negotiate down from the asking price.
Contingencies: Ensure that your offer includes contingencies that depend on a satisfactory due diligence process. This will protect you from unforeseen financial pitfalls.
Final Practical Advice
Engage a Business Broker: If you haven’t already, consider working with a business broker who specializes in your industry. They can help provide insights into proper valuation and assist with negotiations.
Seek Financing Options: Explore bank loans or alternative lenders for the remaining funds. A detailed business plan highlighting the growth potential and structured cash flow forecasts can enhance your chances of securing financing.
Conservative Financial Projections: Prepare detailed cash flow projections and stress-test them against scenarios such as lower-than-expected revenue or unexpected costs to ensure you can handle cash flow in the early stages post-acquisition.
Exit Strategy: Always have an exit strategy in mind, whether it’s selling the business after several years or transferring it to a family member, ensuring that you’re safeguarding your investment.
Buying a business is a multifaceted decision, and having clear financial projections and understanding your cash flow is critical. Best of luck with your venture!
Your analysis of the acquisition opportunity is thorough and insightful. It’s great to see you taking a structured approach to evaluating the purchase. Here are a few thoughts that might help you refine your strategy and bolster your decision-making process:
1. **Detailed Financial Analysis**: While your expense breakdown is commendable, I would recommend conducting a sensitivity analysis on your projected revenue and costs. Considering factors such as potential market fluctuations or unexpected expenses could provide a more robust financial picture. This can also help you determine how the $1.725M offer aligns with those potential risks.
2. **Valuation Considerations**: Regarding your offer of $1.725M in relation to the seller’s reserve price, it may be beneficial to understand how the business has performed in its valuation history. Are there any comparable businesses in the area that have sold recently? The more data you have around valuation benchmarks, the more compelling your negotiation position becomes.
3. **Contingency Planning**: In addition to setting aside a working capital reserve, think about potential contingencies. Building additional cushion funds for unforeseen circumstances can provide peace of mind as you take on full ownership. A strong reserve can serve as a financial buffer while you integrate into the business.
4. **Engagement with Advisors**: The variety of advisors you plan to engage is a prudent step. When working with specialists, ensure they have experience specifically in the waste management sector. Their insights can be crucial in navigating both the unique operational challenges and regulatory requirements specific to