A business buyer is concerned about high interest rates (even as they’ve come down a bit), and she’s not alone. But here’s the thing—she approached it incorrectly. She worked backwards, assumed higher rates meant so much going to interest there would be no salary for her.
- First, good bankers and banks won’t let you get overextended.
- You budget for an owner or CEO salary before determining price and debt coverage.
- Debt coverage is key and good banks will want a 1.5-1 debt-to-income ratio. This covers your debt, with a cushion.
Buyers, don’t overthink these points, focus on what you can control. Buyers should consider the following
- More seller financing as it doesn’t have bank fees and can be more flexible.
- Having the seller retain equity reduces the buyer’s financial burden.
- Put in more equity. Getting overleveraged is risky and stymies growth (as growth sucks cash).
The key takeaway? Don’t let interest rates discourage you, they’re just one component of complex deals.
