How Banks Value Your Business

"Selling to Employees? Discover the Value Banks Place on Your Business”

Employee Buyer – Paid at Closing – How Much?

When selling your business to an employee, one of the most critical questions is, “How much will I get paid at closing?” The amount you walk away with is influenced by several key factors, including the bank’s lending terms, the employee’s financing options, and, perhaps most importantly, the value of your business.

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The Small Business Administration (SBA) offers a fantastic opportunity for employees to purchase a business with zero down payment. That’s right—no upfront money needed. This enables business owners to get fully paid at closing, while making it easier for employee buyers to smoothly transition into ownership.

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The SBA’s mission is to “help Americans start, grow, and build resilient businesses,” and they have documented higher success rates when key employees take over the business from a retiring owner—making a zero down payment feasible in certain scenarios.

However, not all banks offer this option. Many require a down payment of 20% or more, often referred to as an “equity injection,” to reduce their risk. But here’s the good news: as former commercial loan officers, we work with banks that do not require this equity injection, ensuring you can still receive full payment at closing without your buyer needing to make a large initial investment.

Our banking partners may require a small down payment, around 10% for transactions they perceive as more risky. In our experience, buyers often use a home equity loan. If this isn’t an option, we have strategies to overcome down payment obstacles, ensuring the transaction goes smoothly.

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Business Valuation – The Key to Getting Paid

Your business valuation is critical in determining how much you’ll be paid at closing. Just like a home appraisal is required before a mortgage is approved, the bank will value your business before lending money to the employee buyer. The higher the appraised value, the more cash you’ll receive.

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As former commercial loan officers, we know exactly how banks assess the value of a business. There are various methods for valuing a business, but the key is to use the same method that the bank will. Most banks don’t rely on the Discounted Cash Flow (DCF) method, which estimates future earnings. Instead, they look at more reliable factors like historical performance from the past three years and a list of signed contracts, which predicts future work and ability to repay the bank.

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Banks Don’t Use DCF – Here’s Why

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The Discounted Cash Flow (DCF) method projects future revenue and expenses over a five-year period, calculating net income and discounting it to present value. While this method is useful for understanding future potential, banks see it as speculative. They prefer using concrete, historical financial data to ensure the business can sustain debt payments.

Banks typically average the financial performance of the last three years to assess business value, smoothing out any one-time fluctuations. This gives them a more reliable snapshot of your business’s profitability and stability.

You Keep Cash and Accounts Receivables

In most cases, as the seller, you will keep the cash and accounts receivables that aren’t part of the transaction. The purchase price typically increases dollar-for-dollar for any cash acquired by the buyer. This is crucial since the new owner will need working capital to make payroll and cover other expenses before collecting cash.  The good news? Our banks finance working capital as part of the deal.

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Subtract Liabilities – A Critical Step

Don’t forget about your liabilities. Whether you pay them off or negotiate for the buyer to assume some of them, liabilities will affect the amount you receive at closing. Most buyers don’t assume vehicle or equipment loans, so it’s important to account for these in your final payout. Think of it like a real estate sale—if your house is worth $1 million but you owe $400,000, you’ll walk away with $600,000.

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Get the Facts, Don’t Guess – Secure Your Future Now

The value of your business isn’t what you think it’s worth—it’s what the market and lenders determine based on hard data. Guessing is risky, especially when your financial future is on the line.

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That’s why we offer our Enhanced Broker’s Opinion of Value (EBOV) for just $3,500. With our experience as former commercial loan officers, we provide you with a realistic, bank-aligned value so you can plan your future.  Don’t leave your future to chance—get the facts, secure the best deal, and ensure you get paid at closing.

Act Now!

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