By now you’ve decided if it’s the right business to buy, but before you go any further incurring costs you need to decide whether or not you can afford to buy it.
The first thing you should do is make sure you’re not paying too much for a business and don’t be afraid to ask for a second opinion. Think of it like buying a car, you’ll want take a look around and understand what’s included as part of the deal.
So, how is the acquisition being funded?
You need to consider how you’ll buy the business. There are lots of ways that this can be done including:
- personal funds and assets
- deferred consideration (i.e. some of the funds will be paid at a later date)
- funds from finance providers
- other investors.
The reality of it is, it’ll most likely to be a mixture of any of the above and most deals rely on some form of outside investment whether it be a loan or personal family. However, my advice is to avoid using all of your personal assets – don’t put yourself and your family’s personal assets at risk!
How much will be enough?
Once you’ve got an idea of how you’re going to fund the acquisition, you’ll need to make sure it all stacks up. For this you’ll need to prepare a full set of detailed forecasts which will include a profit & loss account, balance sheet and cashflow forecast.
To do this you’ll need a good understanding of the business you are buying and its financial details.
The most important part of this exercise is the cashflow forecasts, these will tell you how much cash you need. Cash flow is the lifeblood of any business and the key question is, will there be enough cash to fund the acquisition and leave cash in the business to continue trading?
What are my tips when preparing these forecasts?
- Be realistic about what happens in real life. For example, do your customers pay invoices on time? When are the peaks and troughs during the year?
- Have you considered all the deal costs that need to be paid at the start? Don’t under estimate the legal costs, professional fees, bank fees, valuation fees and stamp duty!
- Don’t rely on quick growth to make it work or for it to be affordable. If you are planning on growing the business or making changes, then make sure you’ve taken into account the extra costs that come with this i.e. investment in assets, people, and infrastructure. Growth will also increase your working capital requirements.
- Sensitise the forecasts, what happens if your suppliers increase their prices or sales reduce? Is the business still affordable?
- Don’t underestimate the time it takes to integrate a new business – this could affect the performance at the start but it’s vital this is done right.
- Make sure you take into account any future investment that you may need within the business.
What else should you think about?
Cash is king – make sure you have enough available to survive!
Consider the reasons why you are buying the business and does it give you the answer you want?
Most importantly, will this acquisition give you the lifestyle you desire?