We are often asked by our customers in Colorado Springs, Denver, and the greater Colorado area to estimate the closing costs for a transaction. Because each transaction is so different, it is virtually impossible to estimate these costs until the acquisition has been fully negotiated. Below is a brief discussion of the different considerations involved in determining the average cost of buying an existing business.
The Costs Associated with Buying an Existing Business
This group includes a wide variety of items, such as leases for the premises and/or equipment, insurance policies, and outstanding financial obligations. At closing, these items are prorated on a per diem basis between the buyer and seller.
Most taxes, such as sales or payroll taxes, will be paid by the seller up to the date of closing. Even though the taxes may not actually be paid at or before closing, such as the case with quarterly unemployment taxes, the seller warrants and guarantees that these taxes will be paid in a timely fashion. Other taxes, such as personal property and real estate taxes, which are assessed and collected once a year, are usually prorated at closing. Often these taxes cannot be precisely determined, because the governing authorities have not finalized the rates prior to closing. The buyer and seller usually agree to prorate these taxes at an estimated amount, such as last year’s taxes, whether that be in Denver or Colorado Springs.
When a buyer assumes a seller’s obligations, such as a lease, the seller may have a deposit with the lessor. In these situations, it is customary for the buyer to pay the seller for the deposit at closing and, upon the termination of the lease, the deposit will belong to the buyer, which can impact the total cost of buying an existing business.
Several days prior to closing, the utility companies are notified of the closing and are requested to take final readings on the day of closing. The seller receives a final bill and new service starts for the buyer, so prorations are not necessary at closing. Any deposits will be returned to the seller, and the buyer will be responsible for making new deposits with the utility companies. Sometimes, in dealing with commercial accounts, the deposits can be substantial, so the buyer should reserve an adequate amount to cover these costs.
When buying an existing business, the buyer and seller are each responsible for their respective professional fees, or costs. For the buyer, this would usually include attorney and accountant fees. The seller, in turn, is usually responsible for attorney, brokerage, and accountant fees. The amount of these fees will vary with the size and complexity of the transaction.
The buyer is typically responsible for lending fees, which may include points, appraisals, lender’s attorney fees, and filing fees. Depending on the type and size of the transaction, the amount of these fees can vary significantly. Many lenders will finance loan fees as part of the business acquisition loan.
Many times a Business Broker will request a retainer or advisory fee to cover the cost of assembling data, valuing the business, and getting the business ready for market. Additionally, at closing, the Broker will be paid a success fee (percentages vary depending on the size and complexity of the transaction). Fees are typically paid by the seller, so this will not affect your cost of buying an existing business.
LIEN SEARCHES, TAX CERTIFICATES, AND RECORDING FEES
When buying an existing business in Colorado Springs and Denver, it is customary to conduct and obtain certain assurances from various governmental agencies that there are no outstanding liens against the business assets. Additionally, after the transaction is consummated, it is usually appropriate to record certain documents relating to the transaction. The totality of these charges usually amounts to less than $200.
MISCELLANEOUS COSTS AND WORKING CAPITAL
In addition to the foregoing, it is appropriate for the buyer to maintain an adequate cash reserve to meet those miscellaneous expenses that invariably occur in the realm of day-to-day business operations. The amount of the reserve, or working capital, will depend on the circumstances of each transaction.