Category: Business Planning

Before you buy a loss-making business you must understand why it’s making losses, and how you fix the problem. But you also must know how long it will take to fix the loss-making problem, quantify the losses it will make until it’s profitable and have the necessary money to fund those losses.

You should ideally buy the type of business you know something about or have experience with from past work. But if you want to speed-up the process, and if you buy a larger business with employees that run the business, you may find it’s quicker and easier to buy a business you know nothing about.

To protect yourself from an earnout, include a clawback clause such that if sales or profits fall short post-acquisition, the seller must repay part of the sales price. Also, by funding the acquisition using seller financing, any clawback can be deducted from seller financing payments.

An earnout is when you buy a business, where part of the acquisition price is deferred and contingent on future sales or profits. The amount of the earnout will reflect the business’s performance, with any additional payment due tied to its success post-acquisition.

EBIT is earnings before interest and taxes. To calculate EBIT in simple terms, start with profit before tax, deduct interest income, and add-back interest expense. These amounts are easily found on a business’s profit and loss page, which is included in the financial statements.

EBIT is used to measure a business’s operational profits, or trading profits, and is calculated by adding-back interest paid and deducting interest income from profit before tax. These numbers can be found on the face of a profit and loss, which is included in a business’s financial statements.