Transaction structure and financial requirements will vary depending upon the size and type company involved. Businesses can be divided into four classes. Definition of Earnings, usual Price/Earnings ratios and Terms of Sale vary by classification.
WALL STREET: Usually Public or very large Companies
MIDDLE MARKET: Generally private companies with well defined Corporate structure.
Down Payment: 1X to 2X Earnings to all Cash
Plus: Bank Note(s) and/or Owner financing.
NOTE: Companies that represent a "Strategic Fit" usually will be valued and sold using "Wall Street" protocol. When a strategic reason for purchase is lacking, "Upper Main Street" methods are generally employed.
UPPER MAIN STREET: Private companies with Corporate structure developing. Owner has delegated many functions to others.
Down Payment: Equity of 1X to 2X Earnings
Plus: Bank Note(s) and/or Owner financing.
MAIN STREET: Commonly referred to as "Mom and Pop" businesses. Owner wears all the hats.
Down Payment: 80% to 120% of Earnings
Plus: Owner financing - Bank Financing is rare.
Definition of
Terms:
EBIT = Earnings
Before Interest and Taxes
EBITD = Above plus Depreciation
EBIT-DA =
Above plus non-recurring and discretionary expenses
Discretionary Earnings
= EBIT-DA plus Owner's Compensation
Note: Down payments or equity investments may exceed the levels indicated when inventories and other current asset values are high.
