Buying a Business? Plan Beyond the Purchase Price

Buying a business?

The purchase price may be the largest number in the transaction, but it may not represent the buyer’s complete capital requirement.

A prospective buyer should think about what may be required to complete the acquisition and what the business may need immediately after ownership changes.

1. Start With the Purchase Price

The agreed purchase price provides the foundation for the acquisition budget.

But the amount paid for the business and the amount of cash a buyer ultimately needs can be different.

Financing structure, working-capital requirements and other transaction costs can affect the total amount required.

2. Understand the Buyer’s Equity Requirement

If acquisition financing is involved, a buyer may still need to contribute personal or investor capital to the transaction.

The amount depends on the financing structure, lender requirements, deal characteristics and buyer circumstances.

Buyers should understand how much capital they may need to contribute rather than assuming financing will cover the entire transaction.

3. Consider Working Capital After Closing

The business still needs to operate after ownership transfers.

Payroll, rent, inventory, suppliers, marketing, insurance and other operating expenses do not stop simply because the company has a new owner.

A buyer should consider whether additional working capital may be needed during the transition period.

4. Review Inventory and Other Assets

Depending on the business and transaction structure, inventory or certain assets may require separate consideration.

Buyers should understand exactly what is included in the purchase price and what may require additional funding.

5. Plan for Professional and Transaction Costs

A business acquisition can involve professional services and transaction expenses.

Depending on the deal, these may include legal, accounting, due diligence, financing or other transaction-related costs.

The exact expenses vary, but they should be considered before setting the overall acquisition budget.

6. Consider Financing Costs and Structure

Acquisition financing is not simply about whether capital is available.

A buyer should also understand the repayment structure, cost, timing, guarantees or collateral where applicable and other material financing terms.

The financing should make sense within the economics of the acquired business.

7. Think About the Transition Period

The first months under new ownership can involve additional costs or operating changes.

A buyer may need to invest in employees, systems, equipment, marketing or other areas after closing.

Planning for those requirements can help avoid treating the purchase price as the entire acquisition budget.

The Purchase Price Is Only Part of the Acquisition Plan

A prospective buyer should work toward understanding the complete capital picture before committing to a transaction.

That can include:

Purchase price
Buyer equity
Working capital
Inventory or asset requirements
Professional and transaction costs
Financing costs
Post-closing business needs

EIN Business Brokers provides a starting point for prospective buyers exploring business acquisition opportunities and preparing for the transaction process.

Purchase structures, financing requirements, transaction costs, due diligence findings and closing outcomes vary by opportunity and circumstances. An inquiry does not guarantee financing or a completed acquisition.

Frequently Asked Questions

Is the purchase price the total amount I need to buy a business?

Not necessarily. Buyers may also need capital for equity requirements, working capital, inventory, transaction expenses, financing costs or other post-closing business needs.

Can acquisition financing cover the entire purchase price?

Financing structures vary. Depending on the lender, buyer and transaction, the buyer may still need to contribute capital or meet other financing requirements.

Why should a buyer plan for working capital after closing?

The acquired business still has operating expenses after ownership changes. Additional working capital may be needed to support payroll, suppliers, inventory and other day-to-day requirements during the transition.