Here are some things to consider:
- If the business was already on a strong growth trajectory, then that will be built into the valuation and likely won’t change the pay-off timeline.
- If the business was valued during peak performance or just before an economic downturn, such as being valued in 2008, then it was likely over-valued and will take longer to pay off, creating a lower return for the buyer and potential payment risk for the seller.
- Business growth requires additional capital to manage, so unless the new management finds a way to make the business materially more capital efficient, then some of the after-tax profits each year will have to be retained for working capital with the remainder going toward paying off the business.
- Even if the capital comes in from the outside, such as in the case of a third party buyer or merger, the timelines still apply because that is how long their capital will be tied up before they even start to see a cash return. It is like having your money tied up in a 10-year CD at a bank and then after ten years, you can start to receive the interest payments (profits) each year while your original capital is still tied up.