Over the course of my thirty-two years as a mergers & acquisitions intermediary and my twenty-six years as the President & CEO of IBA, the Pacific Northwest’s oldest & largest business & commercial real estate brokerage firm, I have personally facilitated and been a resource for 1000’s of negotiations related to the purchase & sale of privately held companies, family businesses, and commercial real estate. A common area for negotiations is multiples of EBITDA and CAP Rates (Capitalization Rates). Both of these calculations look at the anticipated purchase price and what the anticipated return will be on the investment, if prior performance continues at its present level. If a company is being purchased for $5 million and EBITDA was $1 million, the multiple of EBITDA would be five and the anticipated return on investment 20%. Similarly, if a building was being sold for $3 million and the net operating income from the property was $210,000, the multiple would be 14.29 and the return on investment 7%. In the Pacific Northwest, in general these would be attractive acquisition opportunities. However, this level of analysis falls short of a proper, comprehensive professional assessment and the potential opportunity of identifying an investment opportunity which justifies motivated action.
Long term, comprehensive investment returns are an important consideration when acquiring a business or real estate. However, potentially more important is the cash-on-cash return generated from an investment. After all, it is not bank or investor risk that is most important to an individual, but their own personal risk and return.
Revisiting the two examples above of a $5 million business acquisition and $3 million commercial real estate purchase, let’s look at the transactions from a cash-on-cash investment return perspective.
In the business acquisition, $1,000,000 exists for debt service and profit. If a buyer injected $750,000 of their own capital into the acquisition (15% of the purchase price) and a lender financed $4,250,000, an amount readily available with a SBA (Small Business Administration) loan guarantee diminishing risk for the lending institution, the resulting annual debt service would be $646,050 with a ten-year amortization loan at a 9% interest rate. After paying that debt service, the buyer would be left with $353,850 of profit or a 47.2% return on the hard cash they contributed to the business purchase. Please share information, if you possess it, about alternative investments other than business acquisitions under your direct control that are vetted and have a track record of historical success that offer similar returns. Looked at from another angle, the buyer would be made whole on their out-of-pocket investment in less than 26 months.
47.2% is a wonderful year one return on an investment. However, commonly business buyers do much better. If in year one post-acquisition, the business provided as an example grows its bottom line 10% from $1 million to $1.1 million, the net profit after debt service increases to $453,950 and the cash on cash return to 60.5%.
Tax allocation strategies can also enhance short term returns, like taking advantage of the up to $2,560,000 of tangible assets that can be written off in year one after an acquisition by employing Section 179 of the U.S. Tax Code (https://www.usbank.com/corporate-and-commercial-banking/insights/credit-finance/equipment/maximize-deductions-section-179.html). Buyers and sellers who do not have quality accounting professionals on their transaction team WILL LEAVE DOLLARS ON THE TABLE. IBA welcomes the opportunity to share contact information of accountants and attorneys with transactional knowledge & experience, wealth advisors, and bankers who can contribute to maximizing outcomes for the highest possible investment return in business and real estate purchase & sale transactions.
Similar cash on cash calculations can be made related to real estate that benefit from lower interest rates associated with financing and frequently twenty-five year terms for loans.
No investment purchase should be made without an exit strategy. So, let’s complete our assessment of the business acquisition with a conservative perspective and an exit by sale after five years assuming that nothing positive happened under new ownership’s executive management and the business continued forward for sixty months at a substantially similar performance rate of $1 million of net income. In this situation, the business would have paid off $1,656,480 of its loan debt of $4,250,000 leaving $2,593,520 that would need to be retired at closing. If an identical transaction is completed at $5,000,000. The one time buyer and now seller, would receive $2,406,480 or 3.2 times the amount paid in cash to purchase the business. This combined with $1,769,250 received in annual annuity payments over five years (minus the $750,000 original investment) would result in a total investment return value of $3,425,730 over a five year period or a 457% return in total on the business investment (or 91.40% per year).
Numerous doctorate and master’s degrees have been earned analyzing pathways to prosperity in the American economy. Consistently at all levels of education and when assessed by ethnic groups, national origin, religion, and gender, entrepreneurs commonly outperform their peers who work for others in terms of financial prosperity (https://fortune.com/2025/09/27/entrepreneur-earnings-self-employed-vs-paid-employees-founders/) and job satisfaction (https://www.pewresearch.org/short-reads/2023/06/30/self-employed-people-in-the-us-are-more-likely-than-other-workers-to-be-highly-satisfied-with-their-jobs/).
If you are a successful entrepreneur who is interested in exploring a best practice exit strategy facilitated with knowledge, experience, skill, and integrity or a person ready to pursue entrepreneurship as a career path, IBA would welcome the opportunity to meet with you. All conversations with IBA are held in strict confidence.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.