In a market where finance is getting more expensive and much harder to get loans approved, it’s a good idea to make sure that you fully understand your budget before you start making inquiries on businesses.
When you are working out your budget it is important to consider all of the additional costs involved in the purchase of your business. Many first-time buyers overlook some of these expenses and end up looking at businesses beyond their true budget.
If you don’t include these items (and more) in your budget you could find that it gets more stressful than it needs to.
Some of the additional expenses to consider when buying a business are:
Financing Costs: Evaluate your financing options for acquiring the business. You can consider various sources such as personal savings, loans from financial institutions, partnerships, or even seeking investors. Calculate the amount you can obtain and the associated interest rates, repayment terms, and any collateral requirements.
Due Diligence Costs. Due diligence often incurs costs for hiring professionals like accountants, lawyers, and industry specialists make sure that you include these in your budget.
Stock at Valuation (SAV). In addition to the purchase price of the business you will most likely need to pay extra for the stock at the point of sale, this is typically calculated by way of a stocktake on the day of or the day before settlement. This figure varies greatly and depends on the size of the business, we see stock levels at anything from $2000 to $50,000 so its good to allow for this early on and have a good idea of what you will be expected to pay.
Rental Bond. You will most likely need to pay a bond to the landlord of the property. The bond serves as a financial guarantee for the landlord. It ensures that they have recourse if you, as the tenant, fail to meet your obligations under the lease agreement.
Typical bonds are either 3 months rent or 6 months rent (plus GST) in some cases if you have limited hospitality experience you may even get asked for more.
Rent in Advance adm Pro Rata Rent. In addition to the bond you will also need to pay at least one month of rent in advance. There may also be a part-month payment due (pro rata) depending on when you settle on the purchase.
Insurance, Certificate of Currency. As part of the lease assignment or granting of a new lease you will need to provide proof that you have insurance, this will need to be paid for prior to settlement.
Working Capital: Determine the amount of working capital required to sustain the business during the initial phase. Working capital covers day-to-day expenses, such as salaries, inventory replenishment, marketing, and overhead costs.
Professional Advice: Engage the services of professionals, such as accountants, and lawyers, to guide you through the buying process. These experts can provide useful advice, and ensure legal compliance. Account for their fees in your budget and make sure you get a few quotes as we see a huge variation in these fees.
By carefully considering all of these factors, you can accurately work out your budget and determine how much you can afford to spend on buying a business. It is crucial to be realistic, conservative in your estimates, and seek professional guidance throughout the process to ensure a successful venture.
This is meant purely as a guide to help you to consider some of the expenses that we see many buyers overlook. The key takeaway should be that if you have $300K to spend then the purchase price needs to be lower by the amount of your expected additional costs.
As always, if you need any help or if you have any questions please reach out to one of the GSE team.
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