Tweet

How Much to Budget when Buying a Business

Written by: Rob Keating

Article Overview: Are you realistic with your new business budget?

How Much to Budget when Buying a Business

As with anything, we are usually attracted to the best and most impressive looking car, boat, house or business, seeing the lifestyle it can provide. This usually leads to looking at high profit businesses, and with that usually comes the higher price tags. So maybe you are able to extend yourself - you've got the vision, enthusiasm, and a lot of good ideas to implement. Unfortunately there are also a lot of variables in the business world, a number of which can and do lead to failure.

The best position is to reduce your risk. Don't spend the lot, struggle to keep things afloat, and then risk loosing it all. Exercise common sense, spending less will reduce your risk. Additional monies can be used at a later stage to expand or grow the business, once you have a thorough understanding of what the business takes.

Obviously, every business purchase is situation and business specific, therefore difficult in determining how much should be spent.

Here are some general guidelines:

1. You need to consider all the factors; don't over look the monthly cash flows, sufficient working capital, possible vendor finance, and the professional fees.

2. Always keep some in reserve for that rainy day - look to what could be your biggest and most likely contingencies, and manage this risk. It is likely to require putting away some cash reserves as a safe guard in those early more vulnerable years.

3. Initially borrow more than you need, this will be the easiest time to get funds. If in 12 months time your new business is struggling and is in need of a cash injection, the bank is highly unlikely to want to lend you more. This could be by way of additional funds borrowed but not drawn on, or establishing a good overdraft facility at the time of purchase. Keep this in place until you're comfortable that you can financially manage your way through the ups and downs.

4. You're likely to be borrowing against assets. When doing this look to maximise your borrowing against the new businesses assets - this may require using the services of a Finance company. It's always easier and cheaper to borrow against the family home - but it may not help you sleep easily.

5. You're also likely to need some bank financing. Banks are risk averse; they like houses and are nervous on businesses. Business borrowings are therefore likely to be secured against family homes (where possible), or other key assets. They will want your proposed business to able to generate sufficient cash flow after expenses before they give you a loan. After all, they want to see that you can meet your financial obligations.

Banks are an important part of the equation, they;

(a) Will usually look at the interest cover, one such calculation is;
(net profit + interest costs) / interest costs = interest cover.
i.e. ($30,000 + $16,000) / $16,000 = 2.8
Anything less than 2 suggests the business has too much debt.

(b) Want security, and will usually lend only 45 - 65% on the tangible business assets valuation, depending on the perceived risk in having to cash-up the particular asset. Want to see 3 years of trading trends, and are generally more comfortable lending on proven franchise systems as this factor tends to improve a businesses success.

Strengthen your bargaining position before you find your business.

Information provided by www.nzbizbuysell.co.nz.

Related Articles
  5 Ways to Handle the "No Budget" Objection
  Top 7 No’s that Derail the Sales Process
  Get the Budget - Skip a Wild-Goose Chase
  Business Franchise
  Buyer's Remorse: What is it? And How Do You Avoid It?

Article Tags:



Related Forum Posts
My entry - 1. The Best Business Books Ever: The 100 Most Influential Business Books You'll Never Have Time to Read - this is a fascinating book about the history of Business theory, and I'd recommend it to anybody. 2. The Big Book of Small Business: You Don't Have to Run Your Business by the Seat of Your Pants, by Tom Gegax. Ditto. 3. PADI: The Business of Diving Book Okay, so this book won't be of use to anyone who doesn't want to start a scuba store, but I did, and this book was of course invaluable to me in reaching that goal.
Exclusive: Interview with Results - Hi Forum Members, I'm helping start up a Business Coaching and Consulting company here in Toronto, Ontario, Canada (a Subsidiary of RSC Business in Los Angeles). As a Research and Development Intern I am required to practice my listening and interview skills by surveying Small and Medium Businesses on thier Business. This Survey is designed by RSC Business to also assist the Business being interviewed more insight into their own business. I am looking to interview about 30 businesses across North America over the span of 3 months. At the end of these interviews I will be publishing a report of the results and they will be made available for free to the Interviewees. The Report data will include responses from a minimum of 100 interviews. I would like to extend this opportunity to members of the Forum. If you would like to have this short 20-30 minute interview conducted on your Business and you reside in North America please send me an email or PM. Please contact me at andy[at]jvprosperity[dot]com to arrange our interview and to get free access to the results when they are published.
Re: Why Some Websites Sell and Others Don’t? - There is myth that if you build websites people will come. It is never through, you need to do a lot of things to make your website to work. You have many models of attracting traffics to your site. PPC Article Marketing SEO Press Release Banner Ads Forum Posting Classified Advertising Media Buying Solo Ads and a lot of more. If you are not doing any of the above your websites will just be one of the millions of the unknown sites in cyber space
Re: HOw to market a B2B consulting company - [quote="zohahunt77":428owzbi]Hi, I was wondering if anyone can tell me the difference between B2B and B2C. I don’t know about b2b marketing but I have done marketing so know things about it. I will suggest you to take online services which will spread your business all over web network. Online marketing is the best way to market any business.[/quote:428owzbi] B2B = Business to Business - You are marketing to other businesses. B2C = Business to Consumer - You are marketing to consumers.
building a list - Good advice Martin... I've traveled down this path and learned that once you get through that brief learning curve, you'll find that it's well worth it. As you build your highly targeted list, you can trickle in your new offerings over time via 'broadcasts'. I use Aweber too, they have excellent support and a great rep. Buying a list? I'm not so sure about that... You'd really have to do some research to find a quality list service. Whether you buy a list or not, I still think setting up a auto-responder should be a priority, your list will GROW.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Track Your Time for Increased Productivity

Quick Tips on Buying a Business

Four Secrets to Earning Income as an Author

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.