How to Evaluate a Business for Purchase Using SDE valuation and SBA Loans
Buying a business is an incredible way to build wealth, and it’s more accessible than you might think! One way to figure out how much a business is worth is by using the SDE multiple. Let’s walk through the process and show you how you can buy a business with just 10% down using an SBA loan—and even see how much cash flow you might have left over after paying the loan.
What is SDE?
SDE stands for Seller’s Discretionary Earnings. It’s the total money the business makes after paying for all expenses but before the owner’s salary, taxes, and other personal costs.
What is the SDE Multiple?
The SDE multiple is a number (often between 2 and 5) used to estimate the value of a business. Here’s the formula:
Business Value = SDE x Multiple
For example, if the SDE is $450,000 and the multiple is 3.5, the business value would be:
$450,000 x 3.5 = $1,575,000
So, the business is worth about $1.575 million.
How to Buy the Business Using an SBA Loan
With an SBA loan, you only need 10% down to buy a business like this. Let’s break it down:
- Down Payment:
You pay 10% of the purchase price up front: $1,575,000 x 10% = $157,500 - Loan Amount:
The SBA loan covers the remaining 90%: $1,575,000 – $157,500 = $1,417,500 - Loan Terms:
SBA loans typically have an interest rate of 10.5% at the time of this post and can be paid off over 10 years (fully amortized). Using these terms, your monthly loan payment would be approximately: $1,417,500 loan x 10.5% interest rate ÷ 12 months = $19,359 per month. Over 12 months, that’s:
$19,359 x 12 = $232,308 per year in loan payments.
What’s the Cash Flow After Loan Payments?
The business is making $450,000 in SDE per year. After paying the SBA loan of $232,308, here’s what’s left:
$450,000 – $232,308 = $217,692
That’s over $18,000 per month in cash flow for you after paying the loan!
Why This is a Smart Investment
- You’re Buying Income: The business is already profitable, so you can earn money right away.
- You Don’t Need Millions: With just $157,500 down, you can control a business worth $1.575 million.
- Healthy Cash Flow: Even after paying the loan, you’d still have $217,692 a year to cover other expenses, reinvest in the business, or take home as profit.
An Encouraging Example
Let’s say you buy a commercial cleaning business for $1.575 million. You pay $157,500 down and take out an SBA loan for the rest. After a year, you’ve earned $450,000 in SDE and paid $232,308 on the loan. That leaves you with $217,692 in cash flow—a strong return on your initial investment. Plus, as you pay down the loan and grow the business, your profits could increase even more.
Crazy ROI right!
Owning a business doesn’t have to be just a dream—you can make it happen! By using an SBA loan and evaluating businesses with tools like SDE and multiples, you can take control of your financial future. Reach out to [email protected] to learn more!
What are you waiting for? Start exploring businesses for sale today and see how you can turn your dream into a reality!