potentially budget at least £75K for costs such as due diligence review, funding, lawyer, etc. Debt Required and Availability - Key questions are is this business fundable, how much debt is going to be needed, what type of debt is needed and how are the repayments structured? Also, at a personal level, are personal guarantees (PGs) needed and does the bank want some kind of ‘hurt money’ (Buyer introduced funds, typically 10%)? Details are covered in more detail in the section on debt. Cash Flow Modelling - Doing a 3 year forward cash flow model including debt payments is critical. If it works (i.e. cash stays at comfortable levels every month in the future) we say the transaction ‘cash flows’. If this is not the case, the transaction does not work and another deal structure needs to be found or the transaction abandoned. Creating an Offer The following are the steps for creating a commercial offer: Step 1 - Determine the Normalised EBITDA of the business. This should be done over a time period that makes sense. In this step, you are trying to determine the run rate of the business currently so for some businesses this would be the last 6-12 months. For more long established businesses a longer time period may be appropriate but it is always about ascertaining the business's current ability to generate profit. Please see the chapter on valuation for a more detailed discussion on this. Step 2 - Determine the multiple to be used. This was covered in a previous chapter but the rule of thumb is 3x -4x under £1M (mostly governed by the quality of earnings or recurring/repeat nature of the revenue stream), 4x to 5x to £1.5M and 5x to 6x up to £3M however this can vary significantly, especially as the normalised EBITDA rises and depending on the sector and risks in the business.
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