Sensitivity analysis

A buyer who projects a business’s results is relying on assumptions about sales and costs. A sensitivity analysis changes those assumptions to see what happens to profit. BDC says projections equip you to discuss financing needs with your bankers; see how to get a loan to buy a business.

How BDC describes the method

BDC says to start by finding the break-even point, which is the level of revenue needed to cover all expenses and start making a profit. That calculation begins with gross profit, which is revenue minus the cost of sales. The next step is to choose the variables that affect profitability, then make them fluctuate across different probable scenarios and look at the effect on profit. BDC also says to check cash, because rapid growth could require more materials than a line of credit allows. Its separate projections guidance says it is helpful to have optimistic, most likely and pessimistic scenarios.

What to check or ask

• Which variables were tested, and why those ones
• Whether the lowest scenario still covers the debt payments in the financing plan
• Who prepared the assumptions, the seller or the buyer
• Whether the analysis was run on cash as well as on profit