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Financing a Business Acquisition

    • 10 posts
    August 25, 2008 6:28 PM EDT
    I am having a bit of a time getting my mind around a new business acquisition.  What is rule of thumb for amount of capital to put down on an existing business? Owner is willing to finance over 5+ years at very competitive rate and I do have capital available.
     What is the typical amount of time one should be willing or able to finance and how much should one expect to pull out of the business at the end of the day (take care of fixed expenses at home).  I want to make sure I cover my debt I incur, cover debt needs, and take care of fixed expenses at home as my salary will be taking a hit.

    Any guidelines......
    • 3 posts
    September 9, 2008 9:32 AM EDT
    It`s hard to put arbitrary limits on business because it`s more about feeling out a situation and weighing it to past experiences. The time you want to stay in a business is determined by what the business and the market does. Your entrance, lifespan, and exit all depend on the variables you inquire about.
     
    As for capital withdraw, I try to keep most of my capital in the business so I can shelter it against taxes. If I want buy a nice car I start an exotic car rental service. When I buy my yacht I will start a charter service.
     
    I always try to be the most efficient with my money. I have a real hard time just taking out a fixed amount of money. It really depends on your company. Of course you need to eat pay yourself that, but when it comes to luxuries be conservative because there are ways to make money on your fun and happiness.

    ---
    Impossibilities are possible. Come to a brick wall and transcend the process of going around, over or through. Just be on the other side.

    HPW Ventures

    • 72 posts
    September 17, 2008 2:31 AM EDT
    Jeremy makes some good points.  The amount of capital you put into the business is based on it`s worth and what you are buying.  For a service business, no more than 20% down is fair.  For a business with assets, you are actually buying the tangible assets, the goodwill of the business  is the variable.  The owner obviously believes in the business, otherwise they would not be offering you terms.  5 years is reasonable depending on the type of business.
     
    Examine the statements of cash flows for the business to determine what is a reasonable expectation for your take home.  See if it flows enough to support a salary to you after all expenses are paid.  Keep your leverage to a minimum, and do a projection of what you can expect from the business if it stays the same, grows, or declines by 30%.  If all the numbers work with a 30% haircut you can safely participate in the business.  If the numbers do not work at a 30% decline, know that you may have to put additional monies into the business, which will be coming from YOU not the former owner.  Identify where those monies will come from in case you need them.
     
    Also look at the current owner`s situation, why are they selling?  Retiring, relocating, cashing out? 
     
    Do your homework.  Pay a consultant if you have to. 
     
     

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    Dale
    www.ourbestidea.com
    www.maskerinsurance.com
    www.maskercreations.net

    • 32 posts
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    • 10 posts
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