Can I afford to buy this $1.9M small business?

Assessing the Feasibility of Acquiring a $1.9 Million Small Business

Are you contemplating the purchase of a small business listed at $1.9 million? If so, you’re not alone in weighing the pros and cons of such an investment. Let’s delve into a specific example featuring a waste management company within my vicinity that has caught my eye due to its solid financial performance and growth potential.

Financial Snapshot

Currently, this business has generated $1.9 million in revenue for 2023, with a net income of $325,000 after accounting for the owner’s salary. The company’s EBITDA stands at $390,000. Notably, revenue has increased by 15% over the past two years, demonstrating a promising trend in profitability. With approximately 10 dedicated employees and a model centered around long-term contracts, this business presents an appealing opportunity.

As someone who can commit fully to this venture, I’m considering allocating up to $300,000 in cash for both the purchase and working capital. However, after drafting a budget, it appears that the estimated costs may exceed my available funds.

Financial Breakdown: Is It Feasible?

I would appreciate insights on the accuracy of my financial calculations below and whether they’re realistic, overstated, or understated.

Proposed Offer

  • Offer Amount: $1,725,000

Cost Breakdown

  • Down Payment (10%): $172,500 (Assuming an SBA loan)
  • Working Capital: $100,000 (To cover payroll, taxes, operating expenses, insurance, etc.)
  • Escrow Fees (1%): $17,250
  • Sales Tax (on FFE): $48,000 (FFE estimated at $800,000 with a 6% state sales tax rate)
  • Security Deposit for Leases: $20,000 (An approximate estimate of $10,000/month)
  • Advisor Fees: $50,000 (Allocated for due diligence on the purchase)

Total Cash Required: $407,750

Breakdown of Advisor Fees

Here’s a closer look at how I arrived at the $50,000 estimate for advisor fees:

  • Legal Fees (1%): $17,000 (Covers drafting the purchase agreement and conducting legal due diligence)
  • CFO/Accountant: $10,000 (Responsible for financial due diligence)
  • Operations Expert: $10,000 (Tasked with inspecting the fleet of up to 8 vehicles and necessary equipment)
  • Insurance Specialist: $3,000 (Focused on reviewing business and vehicle insurance coverage)
  • Environmental Consultant: $5,000 (To assess compliance with waste management regulations)
  • HR Specialist: $5,000 (To evaluate employee contracts and employer obligations)

Questions for Consideration

  1. Are my financial estimates for the purchase realistic, or are there areas that require adjustment?
  2. Is an offer of $1,725,000 reasonable given that the seller’s reserve is set at $1.8 million?

Conclusion

In conclusion, investing in a small business can be a rewarding venture, especially one with a strong financial foundation like this waste management company. However, careful consideration of costs, potential offers, and the overall financial picture is crucial. I’m eager for feedback on my calculations and thoughts on my proposed offer as I navigate this potential investment opportunity. Your insights could help me make a more informed decision.

1 Comment

  1. bdadmin

    Reply

    Certainly! Evaluating the affordability and viability of purchasing a business is a comprehensive process that requires thorough analysis. Below, I will provide insights on your current numbers, along with advice on making an appropriate offer, especially keeping your interest in a waste management business in mind.

    Question 1: Review of Your Numbers

    1. Down Payment and Loan Structure: Your calculation assumes a 10% down payment of $172,500 based on an SBA loan. This is reasonable as SBA loans typically require around 10-20%. However, make sure you check if this specific business qualifies for SBA financing since not all businesses do, especially those with higher risk profiles.

    2. Working Capital: The estimate of $100,000 seems logical for working capital, but ensure to break this down further into specific categories such as payroll, administrative expenses, and business-specific contingencies. Given that you are taking over a business with existing contracts, securing operational continuity might require some buffer.

    3. Escrow Fees: A 1% escrow fee ($17,250) aligns with industry standards; it’s a typical cost associated with closing. Just verify with your escrow company to ensure no hidden fees exist.

    4. Sales Tax on FFE: Your estimate of sales tax on Fixed and Furniture Equipment (FFE) at $48,000 corresponds accurately to the state sales tax rate, assuming the $800K valuation holds. Ensure the FFE valuation is accurately appraised beforehand.

    5. Security Deposit: Your estimate of $20,000 as a security deposit appears appropriate, especially for a business of this scale. Just ensure the lease terms allow for negotiation of this amount based on your operational needs.

    6. Advisor Fees: The total estimate of $50,000 seems comprehensive and covers a broad range of necessary due diligence areas. However, it may be beneficial to seek multiple quotes to ensure you’re getting a fair rate, especially since some professionals might charge differently based on their experience.

    7. Total Cash Needed: Your calculated total cash requirement of $407,750 seems well thought out. However, you should also consider contingency funds for unexpected expenses or delays during the transition phase. A safe buffer of around 5-10% of the total expenses could be prudent.

    Question 2: Reasonableness of Your Offer

    An offer of $1,725,000 is approximately 91% of the seller’s asking price of $1.9M. Considering the following factors can help assess the reasonableness of your offer:

    1. Valuation Metrics: The business’s revenue is at $1.9M, with an EBITDA of $390K—roughly a 4.9x multiple on EBITDA. This is acceptable in many service industries, especially one with stable contracts, but research industry-specific multiples for waste management businesses. If similar businesses in your area are transacting at lower multiples, utilize this information to justify your offer.

    2. Growth Potential: Given a consistent revenue growth of 15% over the past two years, your strategy might hinge on continuity and the potential for further expansion. If you can provide a solid business growth plan that capitalizes on this trajectory, you would strengthen your negotiating position.

    3. Competitive Landscape: Assess if there are other interested buyers. If demand is high and other buyers are willing to meet or exceed the asking price, you may need to reconsider your offer.

    4. SBA Loan Considerations: If utilizing an SBA loan as part of your financing, the bank will seek liquid and reasonable valuation related to earnings. If the lender is confident in the numbers post-due diligence, this will support your offer’s strength.

    Conclusion

    To summarize, your calculations illustrate a thorough understanding of the costs associated with purchasing the business. However, ensure you are well-prepared for unforeseen expenses and negotiate your offer based on comparable market data.

    Additionally, always consult with a financial advisor who specializes in business acquisitions to help refine your budget further and support your negotiating position against the seller’s reserve of $1.8M. Taking these steps will not only give you a solid financial foundation but also improve your chances of a successful transaction. Good luck with your potential purchase; the sector’s stability makes it a compelling opportunity!

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