How to budget for buying a business
Purchasing a business is a large investment, and it is vital to ensure that you have the funds available for the outright purchase and day-to-day running. A business should not be purchased outside of your means, and you should always consider your finances carefully before going through with a purchase. A budget is made up of your available savings, and the amount of finance available to you. In this article, you can learn everything you need to know about budgeting for buying a business.
Purchasing the Business
It is important to be clear with how much you can afford upfront before you start searching for potential businesses to purchase. This will give you an accurate indication of affordability, and reduce the likelihood of being overstretched by an appealing business that you cannot afford.
Your budget for buying the business will include the funds that you can comfortably set aside. This may be supplemented by a bank loan. Securing a loan will require the production of financial projections and a viable business plan. Additionally, you will need to show how cash flow will be managed, and be clear with the bank on how the loan will be repaid. A downpayment of 10-50% of the business purchase price is usually required. It is important to shop around to find a loan that offers the best interest rates. A professional advisor can help you plan what you can afford, and also recommend the best financing options.
Day-to-day running of the business
It may be tempting to spend a large portion of your budget on the sale, but you must also ensure that you have sufficient funds to run the business. This is true, especially in the early months, where there can be surprise costs that you may not have accounted for. Keeping a healthy cash flow is vital for running a successful business, and overstretching with the initial purchase can hinder this significantly.
It is likely that you will want to grow the business, and this too will come with expenses. Expanding a business will usually incur costs for new stock, marketing, PR, and other expenses. You will need to keep all of these in mind and have an approximate idea of how much they will cost.
The day-to-day running of the business requires a constant stream of working capital to keep things running smoothly. We recommend setting aside at least 5-10% of your investment for working capital. This can cover extra growth, and it also means that you have room to manoeuvre in case of any sudden changes in the market, an unexpected event, or any other substantial cost that you were not expecting. Unforeseen problems can crop up, and they can include a landlord raising the rent or a sudden change in the market. It is important to be prepared for the worst so that your business can survive through these conditions.
Be prepared for changes in cash flow
You will also need to consider the nature of the business, and whether it is affected by seasonality. This will definitely affect the working capital requirements, and you should be aware that cash flow issues tend to be the number one cause of small businesses failing. You will need to be able to cope with the natural cashflow drops that can be present in certain businesses.
The budget for running a business will naturally change, and you should regularly review the requirements to ensure that it is sufficient for its evolving needs. An organized budgeting plan ensures that your business can remain financially solvent and that you can take advantage of growth opportunities to expand further.
Budgeting for Fees
You will also need to set aside funds for the fees of transferring the business. These can include solicitors, accountants, and other professionals that may need to conduct repairs. You will also need to consider the wages and costs of suppliers, and whether this is subject to change. Therefore, the upfront cost you pay for the business itself isn’t the only thing you need to budget for. The true cost of purchasing and running a business is greater, and it is vital to be prepared for all outcomes.
Budgeting for a business means being clear with what you can afford. It can be tempting to overstretch yourself to purchase an attractive business, but a clear budget means that you won’t overspend. Once you have considered your budget both for the initial purchase and the subsequent running costs, you will be ready to start scoping potential businesses and putting in offers.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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