What Price Can I Afford?
As you consider the idea of buying an income-producing property, it’s important you not focus on the sales price but that you focus on the entire sales package:
- Financial Sales Package is comprised of the price, sales structure, terms, down-payment, and the flexibility of the seller in assisting with the financing.
- Operational Sales Package could include the amount of land, equipment list, retail inventory list, current reputation, desire of the buyer to maintain vs evict the former clientele, retention of current employees, location, surrounding area, availability of opportunities to expand operations, and so forth.
With each business you evaluate, a buyer needs to outline at least the following:
- Your available cash
- Expected cash flow of the business
- The sales price
- The amount, if any, the seller is willing to finance
- The amount a bank would need to finance (which involves your net worth; a discussion we’ll discuss in another blog)
- Closing costs
- Start-Up Costs (legal costs, accountant’s fees, legal fees to establish the business, appraisal fees, purchasing of remaining inventory, settling on the prepaid expenses of the business, vehicle registrations & licenses, etc.)
- Possibly franchise fees and franchise training fees
- Landlord lease deposits, utility deposits, and so forth
- Property and liability premiums
- Workers compensation insurance premiums
- Expected costs of operations (salaries, maintenance, supplies, etc.)
- Projected budgets of improvements and enhancements which you believe are necessary to grow the business (additional equipment, new signs, new amenities, etc.).
Depending on the entire package, a business that’s for sale for $800,000 could become more out-of-reach to you than one that’s listed at $1,500,000 with the right complete package.
Only after considering the entire opportunity can you truly determine if you can afford to make an offer.