How Much Cash is Required to Buy a Business?
How much money down do I need to buy a business? This is one of the most frequent questions we get from those who want to buy a business. Not all ask that question, however, but should.
Since most people only buy a business once in their lifetime, they do not know how much money they need to buy a business that would fulfill their dreams. And often don’t know how to buy a business at all.
So, how much liquid funds do you need to put a down-payment on a business and how much do you need to close on the deal? A short answer to this question is this. Businesses vary a great deal in price and is down-payment driven. The higher the amount of down payment you have, the more likely you will be able to find a business that meets your needs.
These are the two cash requirements to think about when you start your acquisition search.
1. Down Payment
The amount of down payment needed to purchase a small business varies with each sale depending on the amount of tangible assets included, amount of inventory, and the buyer’s financial situation. Banks are looking for hard assets to collateralize the loan, whether it be from the business or from the buyer.
If the business is SBA financeable, SBA down payments range from 15% to 25% depending on how much goodwill vs. tangible assets make up the deal value. In some instances, a seller may be offering financing to a qualified buyer. Owner financing can range from 10% to 50%, depending on their own personal circumstances.
2. Closing the Deal
In addition to the cash you will pay the seller for the business, there will be a host of additional demands for cash. These issues should be taken into consideration when assessing your financial capacity. Not only will this help determine the price range of businesses to target as realistic acquisition candidates, it will also help one start out on a sound financial footing.
This list is a general list of closing items and is not meant to be all-inclusive and not all may apply.
Closing costs & escrow fees
Legal filings & recording fees
Inventory counting service fees
Sales tax on equipment purchased
Vehicle registration & licensing fees
City, County, & State Business licenses & permits
Franchise license agreement transfer fee
Franchise training fee
Travel expenses associated with franchisor training
Correction of code violation(s)
Landlord lease deposit
First and last month’s rent
Property liability premiums
Workers compensation insurance premiums
Operating cash / working capital
Licensing and permits
Cash to fund credit sales