Buying a business. How does it work?

A real example of what the decision and financing process of a typical transaction would be like

October 11, 2021
How to Value

In one of our previous posts, we talked about how to find the perfect business and get financing to make it scale quickly and easily. As we have highlighted, this is a financing alternative that not only offers this economic boost for the acquisition of a new business but also provides support in the search for the best opportunities and in the analysis of those aspects that make one business more profitable than another and, therefore, a better opportunity. 

Let us recall what this model was based on: 

  1. There was a first stage very focused on finding the perfect business through listings of businesses for sale with pre-approved financing (very attractive for those of you who want to acquire one).
  2. The second stage was focused on analyzing the main KPIs of business growth for decision making.
  3. Finally, we had the financing phase. Once the business had been selected and its growth options analyzed, getting flexible financing adapted to your needs made this model a great opportunity for buyers. 

But how does it really work? In today's post, we want to go a little further and show you a real example of what the decision and financing process of a typical transaction would be like.

I think I have found a good opportunity. What is coming next? 

Let's say you find an Amazon business for sale for a price of $500,000. The business makes $500,000 TTM (Trailing Twelve Months) revenue and $150,000 TTM sellers' discretionary earnings.

*Take into consideration that in this example you have already found the opportunity by yourself. However, if it is not your case, if you have not found your perfect deal, we can help you to find it. 

Focused on the purpose of analyzing the opportunity, which kind of information is required?

For a typical analysis, we would ask you to:

  1. identify the Amazon storefront/seller page, 
  2. provide monthly P&L for the last 24 months,
  3. if available, provide an info memo,
  4. if possible, give us guest access to Amazon seller account(s). 

With all of the above, if the business qualifies after going through our underwriting process, we would be ready to provide a term sheet. 

 

The business qualifies, time to get funded

At this point, our model has offered you a deep analysis of business profitability, so then, you are almost ready for the acquisition… Let’s move now into the financing process. 

For a business with a price of $1.000,000, making $1.000,000 TTM revenue and $300,000 TTM sellers' discretionary earnings, the key terms may look as follows:

  • Amount: $700,000.
  • Minimum equity requirement from your side: $87,500 (balance can be financed with a seller note or earnout).
  • Monthly Royalty: 22.5% of revenues (we always leave some spare cash flow for you to reinvest in growing the business, in this case, 33% of the profits; depending on the specific asset, sometimes we are able to offer a tiered structure so revenues in excess of X are charged a lower royalty).
  • Repayment cap (times the principal amount): 1.15x in year one, 1.30x year two, 1.45x year three, 1.60x year four, 1.60x thereafter.
  • Security over acquired assets.

What does it happen after signing the term sheet?

Once we sign the term sheet, we would ask for due diligence items (these are very standard and include your cap table, corporate structure, and ultimate beneficial owner -this can be skipped on subsequent deals-, the SPA and whatever DD you performed on the acquired asset, which should include trademarks, IP, litigation, etc) and proceed to close. 

If guest access to the seller account hasn't been provided yet, we will need it before closing.

How does it work after closing?

After closing, every month we will read revenues through the Amazon guest access (100% automated process via API) and send you a direct debit to your bank account. Once a repayment cap has been reached, we will stop charging the royalty. You can always choose to prepay at any time. We charge a multiple of our principal – our cost in APR terms is higher than bank debt because of the flexibility we offer but lower than hybrid debt or equity. While the specific cost will depend on the business you are acquiring, a sample structure is:

  • 1.15x if you repay before year 1,
  • 1.30x if you repay before year 2, 
  • 1.45x if you repay before year 3, and 
  • 1.60x thereafter.

Is this making sense for you? Be ready to buy the perfect business and get funded quickly 

Contact us for more information.