Buying a business or franchise is a major financial decision, so understanding all the costs involved beyond just the asking price is critical.
Costs can generally be divided in to set-up costs, the initial investment you’ll need to establish the business, and running costs, the expenses you’ll incur running the business day-to-day.
1. Asset costs
- Buildings, machinery, equipment, tools, stock, motor vehicles. e.g. If you’re buying a manufacturing business this will be a big cost item
- Intellectual property
2. Business premises costs
- Site design and refurbishment – e.g. sellers may not have updated their franchise store for a while, so you may have to consider paying refurbishment costs to ensure your outlet is current and meets the franchisor’s standards. In fact, the franchisor can insist on it
- Basic premises modifications – such as lighting
- Power connection
- Fit-out – e.g. kitchen, bathroom
- Telecommunication installation – i.e. internet and phone
- Leasing fees – such as lease bond, stamp duty
3. Compliance costs
- License costs, such as business registration, ABN, GST
- Domain name registration
- Certificates – e.g. food handling certificate
- Insurances – e.g. public liability, professional indemnity, WorkSafe, building, contents and income insurance
4. Professional service fees
- Legal and accounting costs – do you need to appoint a lawyer and an accountant to review business costs?
5. Signage and marketing costs
- Signage and graphic design
- Initial advertising campaign
- Market research
- Website design
6. Staffing and wages
- Do you need staff from the beginning of the operation?
Are there recruitment costs in finding staff?
- Wages and salaries
As well as your set-up costs, you will also need to set money aside to cover your business running costs. One of the most common causes of new business failure is not having the cash flow to meet business expenses, especially in the first 12 months, so you’ll also need to factor in how much capital you’ll need to get you through the start-up phase.
Ongoing costs include:
1. Borrowing costs – How will you fund the purchase of the business? If you’re borrowing then you will need to consider banking or loan fees.
2. Maintenance costs for tools, equipment and motor vehicles – Motor vehicles are probably the fastest depreciating asset any company will own, so you’ll need to be aware of any ongoing maintenance costs and the cost of replacing equipment in future
3. Internet access fees
4. Utilities – e.g. gas, electricity, water
5. Technology costs – e.g. “In this age of digital disruption, businesses need to take into account the cost of keeping up-to-date with the latest developments in technology. This is especially true for printing companies as so many printing companies have made the move to digital,” says Geoff
6. Shipping/delivery fees
How many hours are you prepared to work?
Another cost worth considering is the cost of your time. It is often said that if you’re not prepared to work a 50-60 hour week, then don’t even consider buying your own business. You do hear stories of people running their own business part-time from home, but these businesses are the exception rather than the rule.
The number one piece of advice for those looking to buy a business is to do your research, and talk with industry experts and mentors. Don’t rush into buying a business without some investigation and making the effort to find an opportunity that’s right for you.
Wondering what questions to ask when buying a business? Check out our top questions to discover if a business opportunity is right for you.Tags: Due diligence, Business buying checklist, Buying a franchise, Buying a business
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