How Much Do I Really Need To Buy A Business?
“How Much Do I Really Need To Buy a Business?”
In this blog I am going to address a few budget issues that Buyers seem to run into, whilst in the purchasing process. I will touch on points such as; The purchase price, stock, Stamp Duty, Legal Fees, Working Capital, Bonds, and Your Transition Money.
The Purchase Price
The price that is advertised to sell a business. You will find that this has been calculated using a systemised methodology which is adopted by most accountants, brokers and business advisors. Many Buyers engage in the purchase process and start to spend money with legal and accountant fees etc, and more before they have calculated the entire budget. This is where Buyers get into trouble.
SAV is an acronyum for “stock at valuation”. This is a real cost and the Buyer needs to account for a level of stock at settlement. The Buyer should only pay the landed invoice cost of the stock at settlement.
When purchasing a business (in Queensland) be prepared to pay the government stamp duty at settlement, usually around 3.5 to 4.5% of the total purchase price (be careful) this also applies to the stock.
Legal & Accountant Fees
Most business brokers are strong advocates towards Buyers engaging a good solicitors and accountants – preferably ones that are involved in commercial business sales rather than family law or litigation lawyers. Many times Buyers state that they have a “friend of the family” who can assist, and more often than not, it ends up costing more in fees for the Buyer because the family friend is out of their depth. Remember that the old saying “you get what you pay for”.
This is one of the main causes Buyers are rejected from obtaining finance because the working capital has not been disclosed properly, or not even considered in the loan application. The working capital is the liquid cash a Buyer has in their bank – Post settlement, which should be sufficient to allow the Buyer to continue the day-to-day running of the business.
In many business transactions Buyers are asked to put up a Rental bond/bank guarantee towards the lease agreement – usually around 3 months in advance.
Your Transition Money
This would apply more to a Buyer that has to complete a training program i.e. purchasing a franchise business where a certain period of ‘full-time’ training is required before the Buyer is approved. In some instances Buyers who are preparing to become a franchisee may have to travel to another state, therefore they will incur extra costs such as; flights, accomodation, food, transport, training fees etc. This is where the Buyer needs to know how much they require to live on and cover any personal expenses whilst they are in transition of purchasing a business.
When you – “the buyer” are asked by a business broker “what is your budget” consider everything mentioned above.
Want to find out more about purchasing a business simply click here and contact me, I’m happy to discuss these points with you further.
Ian Salter – Senior Business Broker