We have written this section of our website because we have found that a lot of buyers have been caught out by additional costs that were not accounted for.
Besides the obvious cost of the business purchase price, there are other costs involved when buying a business that you should be aware of.
At various stages during the business investigation and due diligence process you will have to involve a consultant. In most cases this will be your accountant or/and solicitor.
Consultants charges vary greatly and this cost can easily exceed your initial budgeted figure. The highest cost we have encountered to date was in excess of $600 per hour.
To avoid a nasty surprise, obtain an estimate prior to engaging the consultant and also a hourly rate.
Try not to engage a consultant until the later stages of buying a business when you are sure the business is the one you want. This avoids the unnecessary cost of investigating a business that does not suit you.
In some instances you will need to pay for the landlords solicitors costs for preparing a new lease. In most cases this cost should be reasonable however it is a good idea to try to obtain an estimated cost for this exercise.
Some commercial landlords (shopping centres) charge a lease application fee. The highest fee encountered to date was $1500. This fee could be fully non-refundable if lease reassignment is not granted.
Unless exact to date records exist, this can be a difficult figure to predict. Furthermore, it is a time consuming exercise for both buyers and sellers hence why it is normally left until the very last minute. This can be okay if you are buying a service business where stock levels are quite low or very stable. However, in the case of retail/wholesale businesses, the value of the stock can often be greater than the purchase price of the business itself. It is not uncommon for the stock to be almost double the original estimated amount.
The most commonly unexpected cost is stamp duty. For more information and a stamp duty calculator click here.
You’ll need to engage a solicitor to help and advise you on the contract of sale with buying of the business. Depending on if a property lease is involved, costs for these services range between $1,500 and $8,000 depending on complicity of the purchase. For some large businesses this cost can be in tens of thousands of dollars. Talk to your legal representative prior to engaging them and obtain estimates for their services.
In some cases stock or plant valuation will be necessary and depending on the agreement the cost of this could be paid partially or in full by you. Costs start from $200 and can be up to several thousand of dollars for larger businesses.
If certain equipment is leased or financed and you are taking over the leases or finance, re-financing fees and charges could be payable by you.
Electricity or gas bond could be payable to the utility company. Amount of the money required for the bond varies from company to company and is dependent on power consumption by the business.
Insurances will have to be organised for the day of settlement. Cost for basic small business insurance “package” with public liability, fire etc. are starting from $2000 depending on value of plant and equipment and nature of the business, payable as a lump some or in installments. For more information it is best to contact your insurance broker in the early stages of the business purchase.
It is standard practice for all cost incurred by the business prior to settlement to be the responsibility of the previous owner. However don’t forget or underestimate the working capital needed for running of the business and sufficient reserves are good thing to have as well.
It is common practice for the landlords to require a security bond for the property occupied by the business. This bond is normally an amount of money equivalent to one to three months rent. For retail shops in the best position this can easily exceed $100,000. This is payable either as cash or bank guarantee.