The first step in successfully acquiring a business, is to understand your affordability. Many people begin their search for a business without first considering their financial position in terms of their personal balance sheet and net income requirements from their new investment.
This of vital importance to determine what you can afford as a deposit in relation to the total purchase price, as well as which funding options you could pursue to raise the balance and what the cost of capital impact will be on the business you intend purchasing.
Depending on the size and nature of the business and if it is part of a franchise, there are specific requirements in terms of the purchasers affordability. In general it is expected that the purchaser is able to provide a 40% deposit of the loan amount required.
Certain franchisors also require the purchaser to have additional unencumbered cash available for working capital purposes. In order to determine affordability a review of personal income, expense, assets and liabilities is required.
The following information is generally used to complete an affordability assessment:
Assets (present values of):
- Property
- Vehicles
- Life Assurance Policies
- Loans
- Investments
- Listed Shares
- Credit cards
- Unencumbered cash
Liabilities (amounts owing):
- Mortgage Bonds
- Lease agreements
- Bank loans
- Loans from other financial institutions
- Balance due on Credit Cards
- Balance due on clothing accounts
- Other liabilities
Income (monthly):
- Salary
- Allowances in cash
- Commissions
- Investment returns
- Salary – spouse
- Other
Expense (monthly):
- Tax – PAYE / SITE
- Pension
- UIF (includes spouse’s UIF)
- Medical Aid
- Rent / Bond
- Lease agreements
- Loan repayments
- Insurance premiums
- Life assurance premiums
- Electricity and water
- Rates and taxes
- Telephones including rental, cellular, internet
- Planned Savings
- Credit Card accounts
- Education
- Groceries
- Clothing accounts
- Medical
- Transport
- Entertainment
- Other