Is the Business Bankable?

February 20, 2025

by an intermediary from High Point University in O'Fallon, MO, USA

Searchers by definition are typically working on their very first deal. Wouldn't it be helpful to have a tool that allows you to plug in a few data points on a business and determine what is the "bankable" amount for acquisition purposes?

At IBA we do a fair amount of business valuation work and have trademarked a specific method within the Income Approach to handle this. It is called the Bankability Method. This method measures the amount of debt a business can handle based on it's cashflow history under the prevailing market finance rates. It's a fairly straight forward approach that says a businesses most probable sale price is that which is "bankable / lendable" in the current market.

Give it a look and let me know if you have any questions - https://storage.googleapis.com/msgsndr/EhjpryoCYVQd6MSdpk8H/media/67b7aa764472cf09295abe6e.pdf

Reply by a lender
in Stuart, FL, USA

As far as SBA lenders are concerned, the guidelines state that the buyer should receive a "livable wage". So, what does livable wage mean? It means different things to different people. If the buyer has a sizable outside income from possibly a spouse or say rental income, their "livable wage" may be far smaller than the next person therefore putting less pressure on the cash flow of the business.

This is why it is so important to put the "best" buyer with the best" business instead of anyone who can fog a mirror. Unfortunately, this is where a lot of business brokers fall on their face because they simply do not understand the financing aspect of lending.

The tool (outline) being presented here should be very helpful for searchers. All of us in the SBA world already use similar tools (usually in Excel format).

The one who gets wisdom loves life; the one who cherishes understanding will soon prosper. Proverbs 19:8

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

Thank you. I'll use it on my next client's transactions. Why this? ". . . subtracting a reasonable salary for the owner/manager from the average earnings the business produced in the past."

+1 more reply.

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