Leverage

In a formal business appraisal, the bulk of the report, not counting the boilerplate, is taken up with predicting the future cash flow and evaluating the risk.

Leverage is seldom mentioned. Yet it is one of the key aspects of ROI from the buyer's standpoint. The old saw, "It"s not the price but the terms." works in business transactions as well.

Consideration for the transaction comes from three sources: the buyer, the seller, and a third party such as a bank. From the buyer's perspective, cash invested is 100% at risk; third party financing and seller financing may or may not be 100% at risk for the buyer, depending upon the security arrangements.

If there is no collateral outside of the business, the higher the leverage, the lower the buyer's risk, because of the lower down payment. This would be analogous to a purchase money mortgage in real estate where the property is to only security for the loan. In such a case, the less one puts down, the less the risk.

Less risk for the buyer typically means a higher selling price for the seller.


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