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monthly expenses

is there a rule of thumb used for figuring out the money needed to cover monthly expenses when doing a quick review of an opportunity. maybe something like 15% of gross sales?

traditionally is there 30 days of expenses added to the loan amount? I know an exisitng successful business will have cash flow but what if its cyclical due to the type of industry and you could easily find yourself month one not being able to make payroll or cover rent. How is this usually cured for during the buy/sell transaction.

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Answers (5)
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Much more info is needed to properly answer this. I see you listed Metal as Industry. I'm in the Metal industry and require about 3 TIMES GROSS SALES to cash flow my business. It could vary wildly but 15% of gross sounds CRAZY low!! It would keep me going for less than a week.

Sep 9, 2011
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The BAF Group LLC

Mike, if they cannot or will not offer you information about COG and Expenses, you don't want it. Whether they don't know, or will not offer it, there is a radical problem there. You could potentially get a forensic accountant to do that for you, out of your pocket, but that better be one heck of a business for you to go to that kind of expense. (You will want an accountant to review whatever they give you anyway; but if he/she has to look into it from scratch, that could be a bundle of dough for a business that may be worthless!)

You should be able to ask for Balance Sheets, P&Ls and Tax Returns, as well as an Aging Report for their Accounts Receivables. You don't get 'em, again you don't want that business! I cannot comprehend anyone wanting to sell that is not prepared to offer that kind of documentation to you, immediately and without hesitation. As Brokers, we do the typical adjusted Seller's Discretionary Income report, but we offer the data stated above, so you can see how and where we derived the basic information we used. That is to permit you/your accountant to check our methodology and arithmetic. Not providing you with that material is like asking a soldier to go into battle without ammunition!

Good luck.

Sep 6, 2011
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Chester County, PA

thanks for the reply. Don that was my thought. I could never get a straight answer out of some folks when asking about their recievable time frames and monthly COG/expenses. I figured they didnt know or were trying to hide it. Either way its something I need to understand before moving a deal forward.

Good to hear it may be able to be part of the overall financing if needed.

Sep 6, 2011
Buy-a- Company

Don's answer is spot-on. I hope you heed his advice.

I have been advising about the accounts receivable issue for years. If you have a company where the average time to payment is 60 days ( and that has been stretching higher, lately), that means you need that much cash just to finance at the start. Or, at least your cost of goods for those sales. That amount of the first 60 days worth of sales you will NEVER receive, until you sell your company. Cash is always 60 days behind. When do you get to spend that first 60 days of sales dollars? AFTER you sell the company.

You need to finance that as well.

Sep 6, 2011
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The BAF Group LLC

This is why I keep preaching that the Buyer should have between 3 and 6 months of cash reserves available for the transitionary stages of the acquisition. Historically, SBA loans have been known to allow up to 3 months of such cash in their loan proceeds. The Buyer is frequently not certain about whether that is going to be permitted until the deal is approved, I believe. And whether that is allowed can vary with the kind of business is being sold. But keep in mind that the overwhelming number of businesses that fail, do so because of undercapitalization.

During the transition, Cash Flow is a major concern. The average deal stipulates that the Seller takes responsibility for all Payables he/she has generated, until the date of settlement; on the other hand, he/she also demands all Receivables generated prior to that date. Therefore, the Buyer needs to understand how the Receivables work, because if the normal payment cycle by the Clients is 60 to 90 days, the Buyer can be without cash for those 60 to 90 days after settlement.

There are other ways to deal with that problem, depending upon the business, so be creative. But I applaud you thinking ahead, for whatever that is worth. Most Buyers do not, and even argue with us when we try to point this issue out to them!

Sep 6, 2011

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