Buying a business is a major financial decision and understanding all the costs beyond the asking price is essential. Each acquisition is so different that it can be difficult to estimate such costs before negotiation starts. Here are some of the kinds of costs that you need to be prepared to pay as a buyer.
Professional fees
If you buy an existing business, both you and the seller are responsible for your respective professional fees. As the buyer, you may need to pay an attorney and an accountant and their fees will depend on the transaction complexity.
Sellers often use the services of boutique M&A firms. Business brokers will analyze and value a business for a seller and get it ready for the market. At closing, they are typically paid a success fee.
Peterson Acquisitions, a top M&A firm, has expert knowledge on how to value businesses to determine fair market value. Fees for this are paid by the seller, so it doesn’t affect your costs
Updating assets
You may need to make some capital investment in assets or refurbish them to get a business up to scratch if it is a little run down. Take into account any update or maintenance costs, like replacing or refurbishing old equipment or tools. The business vehicles may also need attention and this cost can be quite significant so it also needs to be taken into account.
Compliance costs
Compliance is all about ensuring that the business and employees are protected. This means ensuring that all registrations and licenses are up to date.
Find out about specific certifications, such as liquor licenses, environmental impact permits, import permits etc. and whether they are current. Depending on the type of business you buy, you may need to re-assess all the business insurances.
Training and staffing costs
If you’re investing in an industry that is new to you, you may need to do some training before you take over. You may find that this training needs to be ongoing and include employee training too. This can be expensive and so you need to include it in your budget.
Whether a business retains its existing staff will depend upon the owner. You may need to recruit and train new staff. This can take time and money so you need to factor it on.
Business loan fees
You are responsible for lending fees that may include lender’s attorney fees, appraisals, filing fees etc. Depending on the size and type of transaction, the fees can vary considerably. Many lenders finance these loan fees as part of a business acquisition loan.
Assumptions
Assumptions include a variety of items, including any outstanding financial obligations, insurance policies and premises or equipment leases. These items are prorated at closing.
Taxes
Most taxes, such as payroll taxes, will be paid by a seller until closing. In some cases, certain taxes, such as quarterly unemployment taxes, may not be paid before closing but the seller will usually guarantee to pay them in a timely manner. Yearly taxes are usually prorated at closing.
Utilities
Prior to closing a sale, utility companies have to be notified. They take a final reading on closing day so that the seller can receive a final bill. Any deposits are returned to the seller and you will have to make deposits with the utility companies.
Deposits
When you assume the obligations of the seller, such as a lease, the seller may have a deposit with the lessor. In such a case, you may pay the seller for the deposit at closing. When the lease is terminated, the deposit will belong to you.