Can the business pay for its own purchase?

Before the asking price is worth arguing about. Almost every business purchase is repaid out of the business's own future profits, so the deal is really a bet that the earnings continue. This works out what the first year costs, what is left over, and what happens if trading comes in below plan. It runs entirely in your browser: no email, no account, and nothing you type is sent anywhere, including to us.

How the sum works

Three things have to be paid in the first year, and all three come out of the same profit:

year-one cost = (amount borrowed ÷ years) + (amount borrowed × rate) + (deferred ÷ years)

Worked through on a business making £300,000, bought for £1,200,000 at a 4× multiple, with £150,000 of your own cash, £500,000 borrowed over 5 years at 9%, and £550,000 deferred to the seller over 4 years:

That is 5.8% — before tax, before any equipment the business needs, and before anything goes wrong. Which is why the stress test matters more than the headline: at 10% below plan the profit is £270,000 against the same £282,500 of cost, so the deal is £12,500 short in its first year. One ordinary bad year is the entire margin of safety.

Whichever seat you are in

A business changing hands has a seller, a buyer, and sometimes the management team in between. It is the same arithmetic from all three seats, and none of them can comfortably ask anyone:

Frequently asked questions

How do you work out whether a business can pay for its own purchase?

Add up what the deal costs in its first year — the capital repaid on any borrowing, the interest on it, and any instalment owed to the seller — and compare that total against the annual operating profit. What is left is the headroom. With £300,000 of profit and £282,500 of year-one cost, the headroom is £17,500, or 5.8%.

How much headroom should an acquisition have?

There is no single right figure, because it depends how stable the profits are and how much the business needs to spend on equipment. The useful test is not the headroom itself but what happens to it when trading disappoints: run the same sum with profit ten per cent lower and see whether the deal still covers its costs.

What is deferred consideration?

Part of the purchase price paid to the seller in instalments after completion rather than on the day. It reduces what has to be borrowed, but it is still repaid out of the business future profits, so it belongs in the year-one cost alongside the loan.

Why does the multiple matter less than the repayment period?

Because the price is mostly repaid out of future earnings, the same multiple over four years and over eight years are completely different deals. Negotiating the price without negotiating the schedule settles only half the question, and leaves the half that decides whether the business survives the first year.

How is the interest figure calculated here?

On the opening balance, using straight-line capital repayment. That is the first year and the highest year, which is the one that matters for testing affordability. A lender amortisation schedule will show interest falling in later years as the balance reduces.

Are the numbers I type sent anywhere?

No. The calculator runs entirely in your browser. There is no email field and no account, and nothing you enter is transmitted to Instilus or anyone else.