Calculating your purchase price

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From the sellers' view, the value of their publication(s) is usually not as high as they would like. The industry used 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 of loan, the security of a loan, or a buyers' return on investment needs, the most typical time periods are five, eight, 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: 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, consider the following:

           

Purchase Price

$900,000

$900,000

$900,000

Investment Recovery in Years

5

8

10

Annual Recovery Amount

$180,000

$112,500

$90,000

2016 Cash Flow

$220,000

$220,000

$220,000

Balance of 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

$700,000

$700,000

$700,000

Investment Recovery in Years

5

8

10

Annual Recovery Amount

$140,000

$87,500

$70,000

2016 Cash Flow

$220,000

$220,000

$220,000

Balance of Funds for Buyer

$80,000

$132,500

$150,000


The buyer may have other factors that allow him or her to make the higher offer.  For example, the buyer 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 recovery 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 ...

Lewis Floyd is a senior associate with W.B. Grimes & Company, with responsibility for the Southern states.  He may be reached at (850) 532-9466 or lfloydmedia@gmail.com.

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