Deferred - 30% of Enterprise Value = £720K paid quarterly over 3 years so £240K per year. Earn Out - 75% of amounts over £600K Normalised EBITDA in year 1, 50% year 2, 25% year 3. (Note: EBITDA will be constructed from a Gross Profit % to derive a ‘synthetic EBITDA’ post-sale for simplicity). Excess Cash - The business will be sold on a debt free/cash free basis. Based on the balance sheet we have, this is estimated to mean £150K going back to the Seller at closing. Director Loan Write-Off - Based on the balance sheet we have, there is a director loan of £100K. This will be effectively written off (there are some accounting choices here) at closing probably at 10% or 20% Capital Gains Tax (CGT) rates to be paid by the Seller rather than their normal highest tax rate (check with your tax advisor). Does It Cash Flow? Now we need to determine if the deal cash flows: Step 1 - EBITDA is £600K - 25% tax of £150K = circa £450K of available cash. Step 2 - Closing payment is £1.68M less equity investment of £300K = £1.38M cash flow lend over 6 years = circa £300K per year (this will vary depending on interest rates of course). Step 3 - Deferred payment is £240K per year + £300K cash flow lend = £540K debt service. In this case, the answer is NO…this offer does not cash flow. The £540K debt payments exceed the £450K which is available. One way to make this work could be to: 1. Push the deferred payments out further if the Seller will allow it.
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