An asking price means little to a buyer until they know what it costs to carry. Most acquisitions of small businesses involve a loan, often one backed by the SBA 7(a) program. So the real question behind every CIM is not "what is the price" but "after the loan payment and my own pay, what is left."
Many CIMs leave the buyer to work that out alone. The ones that show it get to a yes or a no much sooner.
Four numbers a buyer needs
- Total project cost: the price plus closing costs, working capital and loan fees.
- Cash to close: the buyer's down payment on that total.
- Annual debt service: twelve monthly loan payments.
- Free cash flow: earnings, minus debt service, minus what the buyer needs to pay themselves.
Debt service coverage
Lenders test a deal with the debt service coverage ratio, or DSCR: the cash available to pay the loan, divided by the loan payments. A ratio of 1.0 means the business earns exactly enough to pay the bank and nothing more.
Lenders want a cushion above that. A minimum around 1.25 is a common rule of thumb, though every lender sets its own standard and many look for more. A CIM that shows coverage at the asking price, and how far earnings could fall before coverage breaks, answers the lender's first question before the lender asks it.
Do not forget the owner's pay
SDE includes the owner's compensation. A buyer who plans to work in the business still needs an income, and a buyer who plans to hire a manager needs to pay one. Either way, that cost comes out before the deal's true return is visible. Showing free cash flow after a reasonable salary is more honest than quoting a multiple alone.
Let the buyer change the assumptions
No two buyers have the same terms. One has more cash, another has a different rate quote, a third would offer less than asking. A static table answers one scenario. A model the buyer can adjust answers theirs, and a buyer who has priced their own deal is much closer to making an offer.
Stay on the right side of the line
Financing illustrations are not loan commitments, and the CIM should say so. Pre-qualification letters describe what a lender may do for a qualified borrower, not what it has agreed to do. Label assumptions as assumptions, and keep the disclaimer close to the model.
This article is general information for brokers and sellers. It is not legal, tax, or financial advice, and practice varies by deal, lender, and state.