Business Acquisition Funding Costs You Must Plan For
When considering a purchase of a company, the initial cost that buyers typically take into account is the cost of acquisition itself. But the actual cost of acquisition is far more complex than that. The business acquisition funding is not merely an act of acquiring a business; it is also a matter of ensuring you have the funds needed to run the acquired business from the very start. This guide will help you understand the true cost of ownership so you can budget accordingly and avoid unexpected cost gaps after purchase.
The Difference Between Total Investment vs. Purchase Price
The purchase price of an acquisition is simply the beginning of the transaction process. Although the vendor will usually provide their valuation based on a valuation multiple and EBITDA, buyers need to assess how much money will be needed in total to successfully complete the deal. While planning how to get business acquisition funding, you should identify the amount you will be paying for the business (i.e., purchase price) and the costs associated with acquiring and operating the business. This will allow you to better anticipate the costs associated with the acquisition before, during, and immediately after closing the transaction.
Working Capital: The Life Blood of Business
What comes to mind first when we talk about working capital? Definitely a money thing. It is probably the one expense less noticed and thus underestimated by many. The fact is, even businesses that are successful have to have some cash readily available to meet their payroll, buy inventory, pay rent, and utilities.
A majority of business acquisition funding arrangements will have buyers committing to putting in a certain amount of working capital for small businesses to be able to run smoothly after the close. Having the capital to weather the transition period when the business changes ownership and there may be revenue changes is what this cushion is all about. Going unsupported by a working capital plan can lead new owners to have to raise money in a hurry, even if it means getting funds on their credit card, which will be far from their desired method of financing.
The Cost of Due Diligence You Can’t Afford
Due diligence is an important step to make sure the business you are purchasing is what it claims to be. There is financial, legal, and sometimes environmental due diligence involved.
Expenses would include:
- Fees for financial analysis – CPA
- Legal costs for contract and compliance review
- Industry experts or consultants
These expenses, while optional, are essential for your protection. Effective due diligence shields your business acquisition funding investment from potential liabilities that may not be revealed until after the acquisition.
Transaction Expenses and Closing Fees
Buyers often ignore the numerous one-time costs associated with closing a deal. These costs can add quite a bit to your overall budget and should be included in your financing plan. Common types of transaction expenses are:
- Origination and underwriting fees
- Legal documentation fees
- Escrow fees and filing fees
Most lenders that finance business purchases will not fund these costs unless they are paid in full at closing or part of the financing vehicle, so planning for them ahead of time is critical.
Financing Costs and Interest Over Time
The capital cost is one of the key considerations. The effect of the interest, fees, and repayment terms on your future cash flow is quite substantial. This applies whether you are seeking financing through the SBA or through conventional financing for your business acquisition. It is equally important that you determine the total repayment amount, and not simply the monthly payment. This will allow you to ensure that your cash flow projection exceeds what you need for meeting your debt repayment service. Indeed, this process assumes equal importance to ensure that your business acquisition financing has been properly designed to align with your revenue projections.
Contingency Reserves: Planning for the Unexpected
No acquisition is ever totally predictable. Unforeseen repairs, slow accounts receivable, and market changes can occur. There is also a “contingency reserve,” which usually constitutes between 10% and 15% of total investment. This serves as an investment safety net. Smart buyers factor this amount into their business acquisition funding plan.
Establishing a Comprehensive Funding Plan
Acquiring financing requires a holistic approach from buyers. The proper approach to business acquisition funding is an effective mix of purchase price, working capital, expenses, and reserves. It’s essential that you plan well so that you can enter your ownership phase well-prepared, poised for growth, and not cash-strapped.
Conclusion
It is a major milestone to buy a company, and the success is dependent on your financial plans. Being aware of the entire cost involved, from due diligence to purchase and working capital, will help you to seek funds to purchase your business, and this will be a success factor. It is essential to plan your expenditures beyond the cost of acquiring a company, and this will not only save your capital but will further help you to be a confident entrepreneur from the start.
