Financing a business - where to put the cash?

[freddies_dad]

Hello illustrious business persons of Pistonheads,

What's the consensus on what to do with a chunk of cash when buying a business?

Would it be best to put as much towards the purchase price, thereby minimising the amount borrowed (seems financially prudent) or would it be better to keep the cash floating around as cashflow problems can, as I understand it, very often be the cause of the demise of many businesses.

The above assumes "normal" interest rates on, for example, any borrowing and no opportunity for offset accounts and the like. Cash amount would be something like 25% of the maximum borrowed amount.

Cheers,
Phil.

[Plotloss]

Largely depends on projected turnover in year one I would have thought.

Remember, cash is KING

Nothing else matters.

[Eric Mc]

If you are "buying" a business I assume you are paying someone else in order to acquire THEIR business. If that is the case, surely the "cash" you are paying out to buy the business goes to them?

[freddies_dad]

Eric Mc said:

If you are "buying" a business I assume you are paying someone else in order to acquire THEIR business. If that is the case, surely the "cash" you are paying out to buy the business goes to them?

Well, that's one interpretation of what I said, but it's not what I meant.

To illustrate;

Cash in my pocket £70

Purchase Price £100
Loan Amount £40
Make up shortfall £60

Cash remaining £10

Now, do I keep that cash as a "float" or should I only borrow £30 and use all the cash (£70) to make up the shortfall in the purchase price (£100)?

[freddies_dad]

Plotloss said:

Largely depends on projected turnover in year one I would have thought.

Remember, cash is KING

Nothing else matters.

I think this largely answers my question and echos what I thought.

It's just the whole "borrowed money is expensive money" thing to balance it against.

[wattsm666]

Would also depend on the security attaching to the loan. If their is no security attaching to the loan then it could be argued you should keep the cash in your pocket in case it all goes wrong, therby minimising your loss. The reality is the security will be tight and therefore this will not make any difference.

[Eric Mc]

Why did you borrow more to buy the business than you actually needed?

Whatver the reasons for the above, it's up to you to decide what you want to do with the "surplus" funds you now find yourself with. You can use it to help boost your business's bank account/assets/stock or you can keep it outside the business completely and spend it or invest it as you see fit in non-business areas.

[freddies_dad]

Eric Mc said:

Why did you borrow more to buy the business than you actually needed?

Err... I haven't. I was giving an illustration and asking for consensus. If I did "borrow more than I needed" it would be to give myself a cash buffer - as I said, as cashflow can kill a business.

Eric Mc said:

Whatver the reasons for the above, it's up to you to decide what you want to do with the "surplus" funds you now find yourself with.

I know - I was after opinions.

[freddies_dad]

wattsm666 said:

Would also depend on the security attaching to the loan.

The security would be the freehold belonging to the business (a pub).

[DavidY]

Keep as much cash as you can, only put in what you need to, then if it all goes horribly wrong you can just walk away with your remaining cash.

Best of luck with the venture

davidy

[freddies_dad]

DavidY said:

Keep as much cash as you can, only put in what you need to, then if it all goes horribly wrong you can just walk away with your remaining cash.

There is that!

DavidY said:

Best of luck with the venture

Thank you!

[Eric Mc]

I am not actually allowed give investment advice so I couldn't really point you in any general direction as to where you might want to invest this amount.

Would it be worth putting any more money into the business?

Are there things the business needs - such as equipment. There are some good tax allowances on Capital Equipment which could help reduce taxable profits. The tax savings could be better than the overall return on a non-business investment.

[freddies_dad]

coyft said:

For you to ask the question implies you are not sure of your working capital requirements. Working capital requirements should be easier to predict when purchasing an established business as you have a trading history that you can use to predict the future.

As someone has pointed out cash is king and you need to get a handle on this concept fairly quickly. Managing your cash flow is a fundamental requirement in running a business. My advice would be to sit down with an accountant and go through the figures to work out precisely how much cash you are going to need. Once you have this figure, try and build in a comfort factor for the unexpected. One thing you can be sure of is that the unexpected will happen sooner or later.

Good luck with the venture.

Great advice. I will do. Thanks!

[freddies_dad]

Eric Mc said:

I am not actually allowed give investment advice so I couldn't really point you in any general direction as to where you might want to invest this amount.

Would it be worth putting any more money into the business?

Are there things the business needs - such as equipment. There are some good tax allowances on Capital Equipment which could help reduce taxable profits. The tax savings could be better than the overall return on a non-business investment.

Well, it'll be a pub so there's the raw materials needed to sell. I think the money would be used exclusively for the benefit of the business rather than syphoned off anywhere. We're talking 6 figures, though, so significant enough.

I'm not sure that there's any "Captial Equipment" that I'd need, but thanks for the info. regarding tax allowance.

[DavidY]

Along with coyft's advice, I know my advice was a bit extreme, but you have to look at te risk element of this venture. It is usually better to be risky with someone elses money than with your own, especially if it's not personally secured.

I've been involved in several business startups and only once undertaken a personal guarantee (for a car, which I reasoned if we sold we could cover most of the debt) and I've never put my house on the line.

davidy

[voyds9]

Keep your money in your pocket as long as you can. You will be surprised how often the air conditioning breaks, the pc fails, you get storm damage etc, if you have money available you can put it right straight away and keep trading rather than waiting for insurance etc.

[Mattt]

I would have thought it would be better to only borrow what you need to purchase the business (plus any cash lockup), then at a later stage if cashflow predictions turn out to be wrong, borrow the extra.

I wouldn't have thought a pub would have many cashflow issues? But i'm no publican.

[Eric Mc]

ANY business can have cashflow problems - even a largley cash based business - such as a pub. I've seen pubs go bust because they couldn't service their finance deals.

[thewave]

Mattt said:

I would have thought it would be better to only borrow what you need to purchase the business (plus any cash lockup), then at a later stage if cashflow predictions turn out to be wrong, borrow the extra.

I wouldn't have thought a pub would have many cashflow issues? But i'm no publican.

I'm of the same opinion. A pub's cashflow is fairly predictable. Only major items are likely to affect cash flow, ie new equipment. All other larger items should be taken into account with the cash budget.

[srebbe64]

freddies_dad said:

Eric Mc said:

I am not actually allowed give investment advice so I couldn't really point you in any general direction as to where you might want to invest this amount.

Would it be worth putting any more money into the business?

Are there things the business needs - such as equipment. There are some good tax allowances on Capital Equipment which could help reduce taxable profits. The tax savings could be better than the overall return on a non-business investment.

Well, it'll be a pub so there's the raw materials needed to sell. I think the money would be used exclusively for the benefit of the business rather than syphoned off anywhere. We're talking 6 figures, though, so significant enough.

I'm not sure that there's any "Captial Equipment" that I'd need, but thanks for the info. regarding tax allowance.

So it's a pub you're buying. The Gross Profit on drinks is VERY high. If you sell a pint of beer for, say, £2.50 from a barrel I would wager it costs you 50p in beer costs (probably less). So, the GP is very high. Equally, the overheads (staff, rent, rates, heating, lighting, etc....) are pretty constant, regardless of whether the pub is selling lots or selling nothing. So, your profit will be entirely turnover driven. Below a certain figure you make a big loss and above a certain figure you can make a big profit. Once your overheads and fixed costs are covered, probably 70p in the Pound goes straight on your bottom line.

Now, answering the question, personally I'd spend the surplus cash on advertising and promotion. The more bums on seats you get the more profit you'll make!