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

Tips on Buying a Business- How Am I Going to Pay for This?

This is a huge business buying tip for you...

Please don’t make the mistake of thinking that because you are buying an existing business that a bank is just going to hand over the money. Even if the business is doing extremely well, this most likely will not happen.

It is true that buying a solid business with strong cash flow will help, but the business type, collateral, length of time in business and your background are very significant. Of course, the down payment you can provide is also a factor.

And no, you can’t just apply for an SBA loan. These are not easy to get and yes you do have to pay them back. The government isn’t that nice. Again, business type, your personal collateral and a lot of other factors determine this loan process. Normally, this is not the fastest way to get a loan either.

The most likely ways you will fund a purchase are with your own money (including property equity, savings, etc.), non-traditional lenders (investment banks/brokers specializing in business loans) and/or seller financing (this is the best by far).

In addition to paying for the business, you need to determine how much excess capital you may need. You will most likely need some cushion money. 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.

Knowing how you will pay for a purchase, especially how much you will have for a down payment out of pocket (or through friends and family) will be a huge factor into determining businesses you can afford. If you can't afford it, it's a waste of time for you, brokers and sellers to bother talking about it.

Once you know you can cover a 20 to 50% down payment (and it can be that high especially for a seller holding a note but it's worth it), you can seek out approval for a bank loan if that's the avenue you really want to take.

So what can you afford? That's for next time...


To Your Business Buying Success-

The Business Buying Guru

Tips on Buying a Business- What Kind of Buyer Am I?

Here's another tip on buying a business.

In my experience, there are three main types of true buyers: those that look only for high cash flow, those that look for decent positive cash flow with the thought of using their experience to grow the business, and those I like to call bottom feeders.

Bottom feeders like to look for sellers in a really bad position such as fighting partners or negative cash flow due to an inexperienced owner. These are perfect to scoop up for next to nothing because the sellers not only want to get out, but they need to get out.

Knowing which type of buyer you are will narrow down your focus later on in the process when you are actually looking for a business to buy. It will also start to paint a picture of how much money you will need to make a purchase that is suitable to your "buyer type".

I should point out that if these are “true” buyers, then there are also “false” buyers. These people are either the unprepared and uncommitted buyer that I am trying to not let you be or they are just looking for information.

Be a prepared buyer. Know what to look for and how to find it along with the tools needed to flesh out, price and negotiate a favorable deal. Get it all here in the toolkit.


More tips on buying a business to come...

To Your Business Buying Success-

The Business Buying Guru