Tip on Buying a Business- What Can I Afford?

Tip on Buying a Business- What Can I Afford?

Usually the cash flow of the business is the best indicator to use for valuing a business. It's also a good way to determine what you can afford when combined with how you will fund the business.

The business cash flow is what you will be using to pay off a loan or return your personal money used for the purchase back into your pocket. For instance, say a business has a $100k cash flow and you buy it for $200K with 50k down. That means you have a note for $150k. Say that the note has a 2 year time frame with no interest from the seller. That means you will be paying out $75k a year for two years.

Take this tip on buying a business: Can you survive personally on $25k or less a year for 2 years? Don’t forget that things will probably slip a little when you take over and that you may need additional capital as is often the case. Do you have enough in the bank to handle this for 2 years?

Determine how much excess capital you may need upfront and not when the problems arise. Yes, buying a business gives you a running start, but it’s very likely that you won’t be running on a smooth track for the first few months after the transition from the seller.

It takes money to make money, but it also takes money to buy a business that makes money. If it took $50k to buy a business with a $200k cash flow, then everyone would and could find a way to make this happen.

Don't kid yourself like I see so many first time business buyers do. If the business you are looking at is doing well and you have no down payment money equal to at least 20% of the asking price (more like 50% for a seller note situation) as well as limited business owning experience, YOU ARE NOT IN THE DRIVER'S SEAT since you can't afford the business. So acting like you know what you're doing is just going to get you in trouble or most likely told to take a hike, to use my usual blunt terms.

Be prepared and know what you can afford so that you'll have a much better and less drawn out buying experience. That's my tip on buying a business for today.


To Your Business Buying Success-

The Business Buying Guru