The Business Our Client Wanted to Buy Showed $300,000 in Profit. We Needed to Know How Much He Would Actually Keep.
By ProfitWise - A Visa Business Plans company
One of our clients was considering buying an established business that, at first glance, looked very attractive.
The company had operated for years, revenue was consistent, and the seller’s financial information showed about $300,000 in annual earnings available to the owner.
Our client had already started thinking about what that income could mean for him personally. Even after making payments on the loan he would use to acquire the business, the opportunity appeared to provide a good return.
Before he moved forward, we wanted to understand what the business would actually look like financially once the seller was gone and our client was responsible for running it.
The $300,000 was a useful starting point, but it wasn’t necessarily what our client would have available after buying the company.
We Started With the Seller’s Numbers
When someone sells a privately owned business, certain expenses may be added back to arrive at the earnings presented to a potential buyer.
Some of those adjustments can be perfectly reasonable. The seller may run personal expenses through the company that a new owner won’t have, or incur one-time costs that aren’t expected to continue.
Other adjustments deserve a closer look.
For example, suppose the seller works full time in the business and performs responsibilities that would otherwise require an experienced manager. If our client plans to oversee the company personally, that may be fine.
But if he expects the business to operate without him there every day, we need to account for what it would cost to hire someone to perform the seller’s role.
A business showing $300,000 in earnings can look very different once a $90,000 management position is added to the expenses.
That doesn’t mean the seller’s number is wrong. It means we need to understand the assumptions behind it and whether they still apply after the sale.
Then We Looked at the Loan
Our client wasn’t paying cash for the business, so the acquisition would come with a significant monthly loan payment.
The seller didn’t have that expense.
Our client would.
That meant part of the cash the business generated each month would already be committed to servicing the debt used to buy it.
We could incorporate those payments into the financial projections and show our client approximately what would remain under different operating scenarios.
This was especially important because he wasn’t simply buying an investment. He expected the business to provide him with income as well.
We needed to know whether it could comfortably support both.
Working Capital Could Change the Picture Too
The purchase price wasn’t the only cash our client needed to think about.
The business still had to operate after closing.
Depending on the company, that could mean carrying inventory, paying employees before customer payments arrive, covering insurance and vendor bills, or absorbing seasonal changes in revenue.
If our client used most of his available cash for the acquisition and then discovered the business needed another $75,000 to operate comfortably, he could find himself seeking additional financing almost immediately after closing.
We wanted to estimate that need beforehand and ensure it was included in his plan.
We Also Wanted to Know What Could Go Wrong
The seller’s historical performance told us what the business had done under the current owner.
Our client needed to know what might happen under new ownership.
There is always some uncertainty when a business changes hands. Customers may leave, an important employee may decide not to stay, or revenue may temporarily slow while the new owner learns the operation.
So we didn’t want to build the analysis around only the best-case scenario.
We could also model a 10% revenue decline during the transition or a payroll increase to retain key employees. We could also consider upcoming equipment needs and other expenses that might not appear prominently in the seller’s recent financial statements.
If the business still produced enough cash to cover its operating expenses, acquisition debt, and the owner’s needs under a more conservative scenario, our client would have much more useful information about the financial cushion built into the deal.
If a relatively small revenue decline created an immediate cash problem, that was equally important to know before buying.
The Seller’s Profit and the Buyer’s Income Aren’t the Same Thing
This distinction became central to our analysis.
The seller may legitimately have earned $300,000 from the business last year.
Our client could buy the same company, generate similar revenue and still have a very different financial experience.
He might have acquisition debt the seller didn’t have. He may need to hire someone to replace work the seller performed personally. He could inherit higher payroll, insurance or vendor costs, and he may need to keep more cash inside the business to support operations.
We wanted to account for those differences before our client decided how much the company was worth to him.
This Is Where Financial Analysis Before the Purchase Matters
Once the acquisition moved forward, accurate bookkeeping would be essential for tracking how the business performed under its new owner.
But there was also an opportunity to use financial analysis before our client committed to the purchase.
We could review the historical numbers, question the assumptions behind the seller’s earnings, estimate working-capital needs and build projections based on how our client actually intended to operate the business.
Through our Fractional CFO work, we could also test different scenarios so he could see how the acquisition might perform if everything didn’t go exactly according to plan.
The objective wasn’t to find reasons not to buy the business. It was to make sure our client understood what he was buying financially and how much room he would have if the first year looked different from the seller’s last one.
A Profitable Business Can Still Be a Difficult Acquisition
The business our client was considering had a history of making money, and that was certainly important.
But historical profit was only one part of his decision.
He also needed to understand what the company would cost to operate under his ownership, how much cash would be needed after closing, what the acquisition debt would do to monthly cash flow and how much he could realistically expect to take out of the business.
Once those pieces were included, the $300,000 figure had much more context.
For someone buying a business, that context can make a significant difference. The number the seller earned last year tells you something valuable about the company, but understanding what is likely to remain after you own it tells you much more about whether the acquisition works for you.
