How much can I afford to spend buying a business?

How to buy a business

If you’re on the hunt for a business, you’ll find there’s no shortage of companies you can’t afford. While it’s important to find a business that is right for you, overstretch yourself and you’ll risk running into problems further down the line.

So work out what you can afford and whether you’ll need to factor in financing, too. Once you’ve established a price range, stick to it.

Cashflow

When you’re looking at a prospective business’s accounts, pay attention to the cashflow and work out if you’ll need to tide yourself over a period when the business might earn little or no money. This is especially important for businesses that are seasonal. Buy a seaside café in November and you might well be looking at a few lean months before the holiday money starts coming in. It’s also wise to plan for contingencies such as rent rises or equipment failure. Cashflow problems can scupper the most promising enterprise so make sure you’re in a position to weather the storms.

Risk

Every business has its weakness. As you’re probably investing a substantial chunk of your own hard-earned cash into your new venture, you’ll want to make a realistic evaluation of risk upfront. Some risks – like fire or flood – can easily be covered by insurance, while others – IT problems, for instance – can be mitigated through contingency plans. A few – such as legal liabilities – can be potentially lethal. Identify and assess the different types of risk within the business and make a judgement call on whether or not the projected rewards justify the gamble.

Hidden costs

Don’t forget to include all the associated legal and professional costs you’ll incur when you purchase. Solicitors, accountants and other professionals will want paying before the ink’s dry, whether or not you turn a profit. Make sure you calculate the cost of any outgoings you might have to shoulder – wages, suppliers, repairs and refurbishments – before you get your first pay day.

Finance factor

If you do need finance, decide what kind of deal structure would best suit your circumstances and consider the most cost-effective way of acquiring the necessary backing. A straight-forward business loan may work well but you could discuss alternative funding options with the seller – such as deferred payments or seller financing. If you get turned down for finance due to lack of security or a proven track record, it may be worth taking a look at the government-backed Enterprise Finance Guarantee (EFG) scheme.

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