The answer to this question is simply…..yes you can. But there are many caveats to the answer; a lot of which revolve around the value of the business in question and the amount of capital which you have to deploy. These are two fundamental aspects which are constantly referred to in the context of a private individual buying a business. Consider each in turn:
Let’s firstly take the valuation of the business. A quick method of deriving a valuation would involve using either (i) the net asset value of the balance sheet of the business. There might also be a notional addition to account for goodwill over and above the net asset value or (ii) a multiple of adjusted ebitda. Normally for SME purchases, the range of 3-5x adjusted ebitda is appropriate. The ebitda is often derived from taking a mean average from the past 3-4 years accounts.
The amount of capital any one individual has at their disposal is personal to them but the basic rule of thumb is – the more the better. More capital makes it easier to structure any deal in question and also makes larger deals possible.
Structuring the deal
In terms of the structure of the deal, there are ways to reduce the amount of capital required at completion. For example;
A third factor which will influence your ability to buy a business outright is the percentage of equity you intend to purchase. Consider whether to buy less than 100% of the equity in the company. In this way, the amount required to be funded is, by definition, less.
The percentage of the value of the business to be deferred until a later date will significantly influence your chances of completing a deal outright with your own capital. If you can agree with the seller that they will accept a deferred payment of 50% or more, then this will massively help you. The deferred amount will still have to be factored in to your cashflow projections over the first few years post purchase but at least, you can control the cashflow and use this to your advantage. Alternatively, you might have to consider using bank or asset financing at a later stage to cover the deferred payments.
Example of a deal structure for a purchase using only your own capital
If for example, you only have £200,000 personal capital available, then you could suggest to the seller that you only purchase 70% of the business, with an implied value of £210,000. Taking the 50% deferred into account, you would need to find £105,000 plus costs of £150,000 = £255,000 personal capital required
The cost of smaller deals ie those below £500,000 valuation
Sometimes, the costs associated with completing a smaller deal, say below £500,000 valuation, are too prohibitive and therefore, many of these deals struggle to complete. If total costs to complete a deal are in the region of £150,000, this is substantially disproportionate to the value of the business. Therefore, it’s a personal choice whether to accept paying this level of costs to complete on a purchase with a valuation of £500,000 or less. Even on a valuation at £1m, the effective rate of total costs is 15% of the deal value, which for some, might still be considered very high.
Debt lenders will not usually be interested in funding smaller transactions for this reason. Also, combined with this is the fact that it takes just as long to process and complete on a deal with a £1m valuation as it does for one valued at £300,000 and the margin/profit for the funder is a lot higher on a £1m deal than that on a £300k deal.
Alternatives to debt lenders
There are alternatives to debt lenders in the form of asset based lenders who will support transactions where the business has a strong asset base such as stocks, debtors, plant and machinery or land and buildings, from which they can leverage to provide a funding line. In this way, the buyer can utilise a funding line to provide cashflow capital, at the same time as reducing the amount of their own capital required, but still managing to complete the deal without any debt or equity funding.