Understanding Your Financial Needs When Buying a Business

Understanding Your Financial Needs When Buying a Business

Before diving into the loan application process, it’s crucial to have a clear understanding of your financial requirements. Assess your business goals, projected expenses, and revenue forecasts to determine the amount of funding you’ll need to achieve success. As a general overview for applying for funding is that hospitality businesses require 50% of cash or equity from a property (up to a maximum of 80% of the value of the property).

Example of Equity Calculation

For example:

Property price:                               $800,000

Current mortgage:                        $400,000

Value at 80% of the property:     $640,000

Available equity:                            $140,000

The available equity is the total contribution that can be used from a property.

Applying Equity to Business Purchase

If we go further and discuss an available business for sale, see below an example of a business worth $280,000.

Using $140,000 equity from your home, (incorporate the general rule of 50%) and borrowing $140,000, can be achievable, now of course you will need to be able to service the loan, and there are so many different factors that come into play when buying an existing business, although this can be a starting point when looking to buy a hospitality business. Below is some of what should consist in a business plan.

  • Your experience (business only) – the best thing to do is to talk yourself up, you are essentially pitching yourself to the lender, best way to think about it, is you are pitching yourself and the business to investors.
  • Any other business interests and your successes out of it.
  • Why do you choose to buy the business?
  • What are your plans for the business for the next 12 months?
  • 12 months Projections for Profit and Loss and Cashflow statement (inflows, outflows, and cash balance)
  • Vendors last 2 years of Profit and Loss and Balance Sheet

You will also have to provide your personal assets and liabilities to the lender.

Additional Resources:

Check the posts below to see more information.

Kode Finance

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