Answers to Your Business Acquisition Questions

/ Gordon Bizar /

This question is from a Bizar Financing member who want to know how much income he can pay himself from a company he acquirers:

Question:  If I am looking to make $150,000 to $200,000 in salary a year. What sales size company do I need to buy for me to yield that salary? 

Answer: The size and profitability of the company are critical factors. Here's a detailed breakdown:

  1. Sales Volume and EBITDA:
  • A company generating more than $1 million in annual sales could typically support an owner's salary of over $150,000, provided that the business is well-managed and has decent profit margins.
  • For companies with sales exceeding $3 million, especially if they have an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin of around 15%, paying a salary of $150,000 or more should be feasible even if the owner is not actively involved in daily operations.
  1. Impact of Leverage:
  • If the company is acquired through a leveraged buyout (LBO), where a significant portion of the purchase price is funded with debt, a considerable portion of the company's cash flow will be allocated to servicing this debt. This could limit the available funds for your salary, especially if the company’s EBITDA isn’t robust enough to cover both debt obligations and your compensation.
  • Generally, for an LBO to support a $150,000 to $200,000 salary comfortably, the company should ideally have a revenue of $7-$10 million and an EBITDA of at least $1.2 million. This ensures that after covering debt payments, there’s enough left to pay your salary.
  1. Business Size and Profitability:
  • Smaller companies with sales under $3 million and lower EBITDA margins (below 10%) might struggle to afford such a salary without significant involvement from the owner to drive growth and profitability.
  1. Owner Replacement Considerations:
  • In most cases, if you are replacing the owner and their salary was at market rate for the role they played in the business, that amount should be available to pay you when they leave after a transition period.

Ultimately, while sales are a good indicator, EBITDA is a more critical measure, especially in scenarios involving leveraged acquisitions. The business needs sufficient profitability to cover debt and still leave room for your compensation.

Best wishes,

Gordon

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Gordon Bizar

Gordon Bizar - Expert Business Buyer and Finance Coach Gordon simplifies business purchasing and financing. He makes understandable the use of financial leverage to start, buy or build any business with little or none of your own cash. His unique expertise and success track record has led to his appearances on NBC's Today Show, PBS's Late Night America along with segments on more than 120 other radio and TV news and talk shows. He has been featured in articles in more than 25 of the nation’s leading newspapers including the Los Angeles Times, New York Times, and Wall Street Journal. Gordon personally bought and built companies in fields as diverse as manufacturing, financial services and business education. He also served as Chairman of the California Task Force on Taxation and Regulation of Small Business during the Brown administration and is sought after as a consultant by businesses large and small and government agencies such as NASA for their technology transfer program.

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