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How Much Does It Cost to Buy a Business?

The asking price of any individual business, whether established or startup, will depend on a raft of different factors, including size, profitability, the market it operates in, and what similar business have sold for.

One thing to bear in mind when working out a budget is that the purchase price of an existing business will not be the only expense you have to meet. There will also be the costs of the deal team you assemble to help you get that deal over the line – that will include a solicitor, an accountant and possibly other professionals, such as, for example, an HR expert. You might also seek financial advice, or help with market research. Remember that you don’t have to know how to everything yourself.

Make you sure you allow enough in your calculations to cover everything, and be sure to add in a contingency for those things that don’t go as smoothly as you might hope.

Financial Aspects of Buying a Business

Buying Price

The key cost associated with buying a business is the purchase price. A provisional non-binding price, how it was calculated and how it will be paid, will be included in heads of terms. The final price, however, will depend on a variety of factors. It will be arrived at as a result of negotiation with the seller following due diligence, which shines a light on all aspects of the business and facilitates more accurate valuation, using established valuation methods.

Legal Expenses

You will need legal assistance when it comes to conducting due diligence. However, you will also need assistance with other aspects of the acquisition. You might want your solicitor to help draft heads of terms, for example. You will need assistance with the purchase agreement, and with any clauses such as warranties and indemnities that are included in it. If you purchase the property the business operates from, there will be searches and contracts to complete for that.

Make sure you have a good understanding of what will be required and include it all in your budget.

Due Diligence Costs

There are three types of due diligence: financial due diligence, legal due diligence, and commercial due diligence. Do not instigate due diligence until heads of terms has been signed.

You will most likely hire an accountant to carry out financial due diligence and a solicitor to undertake legal due diligence. When it comes to commercial due diligence, you might have the necessary knowledge and experience to handle that yourself, or you might want to hire, for example, an industry expert to handle that for you.

These things can run on longer than expected. Aim to get a fixed price from your experts rather than working on an hourly rate. That will fix your accountancy fees, legal fees and other expenses, and better protect your budget.

Assessing a Business’s Financial Health

Analysing Financial Statements

The key financial statements to look at are the profit and loss statement, balance sheet, and cash flow statement. Aim to review these historically over a number of years, and also ask for forecasts.

Interrogating and analysing these statements can give you a true picture of the profitability and financial stability of a business. Make sure the net profit is positive.

When verifying assets, don’t forget to check for intangibles like intellectual property.

Identifying Debt and Liabilities

The debts and liabilities of a business are part and parcel of financial health and subsequent business valuation. Debt in a business isn’t a bad thing, but you need to be confident it’s manageable.

Ratio analysis can help you see the implications more clearly. For example, the quick ratio – also known as the acid-test ratio – measures the ability of a company to use its quickly available current assets to cover current liabilities.

You also need to be aware of outstanding obligations – is the seller on top of tax bills, for example.

Funding the Business Purchase

Traditional Bank Loans

Bank loans are commonly used to finance business acquisitions of both existing businesses and startups. They are a good option, and traditional lenders usually offer the lowest interest rates. However, the criteria for being accepted are high. Banks especially prize track record, so you ideally need experience of buying your own business previously, or at least of running the type of business you are buying. Security, and serviceability of the loan, are also key. Expect to have to prepare a business plan.

Banks offer a variety of products, including asset-based lending and invoice financing.

Asset-based lending is just that: lending against balance sheet assets. They have to be tangible, and you can’t borrow the full amount of the asset’s value. If you’re looking to acquire a business that’s asset heavy, it’s normally the cheapest and most flexible option to use.

Invoice finance allows you to borrow against the debtor book of the business you’re looking to purchase, and typically you can release up to 90% of the value. The customer base has to be good quality, the debt has to be B2B, and it must be collectible.

Alternative Financing Solutions

The alternative business finance market looks at things on a case-by-case basis, is more flexible, and moves faster than a traditional lender. The trade-off is the interest rate will be higher. Their products also include asset-based lending and invoice financing.

Additional financing options, such as borrowing from friends and family or crowdfunding, are available. Other alternative financing solutions include equity contributions, seller financing and, in the US, Small Business Administration (SBA) loans.

Equity Contributions

The equity contribution is the amount of the purchase price the lender wants you to provide. Expect a minimum of 10%, but be aware some lenders, in certain circumstances, will ask for more. These funds cannot generally be borrowed; they have to come from personal sources such as savings or investments. Lenders want you to have some skin in the game.

Seller-Provided Financing

With seller financing, you agree to buy the business on a deferred basis. Effectively, the seller lends you the money to buy the business and you pay them back out of profits in line with an agreed schedule. Most business owners will ask for a payment upfront, although it’s possible for the deferred element to be up to 100%.

SBA Loans

In the United States, the government provides Small Business Administration (SBA) loans, supported by the U.S. Small Business Administration. That support means financial institutions are able to provide business loans with more favourable terms or more flexible underwriting criteria than conventional loans. Approved reasons for such a loan include business acquisition.

In the UK, you can apply for a government-backed Start Up Loan of £500 to £25,000 to start or grow your business. This is not a business loan, it is an unsecured personal loan, and you need to pass a credit check to be successful. There is no equivalent to the SBA loan to support acquisition.

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Planning the Business Acquisition

Capital Investments

Capital investment is used for the purchase of long-term assets. If the business has outdated plant and machinery, say, then you may need to make capital investments to update those assets. Capital investment can facilitate business growth.

Capital investment may be fully or partly funded by the business owner. Any borrowing needed for capital investment will be separate to the loan for buying the business. For example, if you want to purchase new premises, you would usually take out a separate commercial mortgage to cover that.

Operational Funds

Make sure you understand the running costs and working capital necessary for operating your new business day-to-day, after taking it over.

Working capital is the money that keeps business operations going. It is used to pay wages and bills, purchase raw materials, and cover recurring expenses including rent and power. You need a few months of working capital in the bank, so factor that in to your plans.

Due Diligence Expenses

As detailed above, you will most likely hire a solicitor and an accountant, and possibly other experts to offer professional advice as well, to help you be confident you have found the right business and to make an accurate valuation. Make sure you know what each will cost you.

Finalisation Fees

When you get to this stage, having made whatever deposit is required by the lender and paid your due diligence experts, there will be additional costs for legal services. There may also be fees to be paid to a business broker, business transfer fees to Companies House, and others besides.

Be confident you understand the costs related to your deal and make sure you have them covered. You don’t want any nasty surprises!

Partnering with a Business Broker

Brokerage Fees

While Dealmakers does not recommend you use a business broker, especially for your first acquisition, we know people do and we understand why.

If you do use a business broker bear in mind there are likely to be fees attached. Make sure you have a full understanding of the agreement you make with them from the outset.

Choosing the Ideal Broker

The UK trade body for firms including business brokers is iTABB. It might prove useful when seeking a reputable broker. You should also take into account experience and reputation.

Negotiation Strategies for Purchase

Preparation for Negotiations

Due diligence will feed in to the valuation of the business and the negotiation of price and terms. Aim to get the seller to tell you how much money they want for the business – or more likely, what they need, as they often have a target for the amount of money they want in the bank.

Be prepared. Know what your red lines are and don’t be afraid to walk away.

Effective Negotiation Tactics

Remember that a negotiation isn’t a battle, it’s a discussion that aims to arrive at a mutually agreeable outcome. Aim to establish good rapport, as that can help grease the wheels.

If you feel obliged to go first regarding price, aim low, but not so low you offend the seller. Remember, this is an emotional experience for them – they are selling their baby. If things start to go off track, you can acknowledge what a big deal the sale is for them, but then turn the focus back to logical elements. Keep the discussion based on facts and figures.

Post-Acquisition Financial Considerations

Property Renovations

If you will be renovating the property the business operates from, whether that property has been purchased or leased, you need to factor in the costs.

You should have had a survey completed beforehand, so that will be a good place to start if renovations are structural. With leased real estate, make sure you record the condition of the building when you take it over. That information can be invaluable when you hand the premises back.

Staff Training

As the new owner, depending on your plans for the business post-acquisition, you might need to factor in training costs. These might be for existing employees, new employees, or both.

If you plan to take on new employees, remember to budget for recruitment costs too.

Marketing Expenditures

Following acquisition, you may want to undertake some promotional activity. Make a plan beforehand and cost it out, so you can include it in your budget.

Conclusion

Buying a business is a costly exercise, and if you aren’t sure what you are doing those costs can mount up. Understanding what is involved and how to structure a deal is where Dealmakers comes in.

Jonathan Jay has helped more than 3,000 people buy successful businesses and become acquisition entrepreneurs, and he has put together the most comprehensive FREE package of business buying resources available today. To get started on your acquisitions journey, download your FREE Business Buying Toolkit now.

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