We are usually attracted to the best and most impressive looking car, boat, house or business, seeing the lifestyle it can provide. This usually leads to looking at high profit businesses, and with that usually comes higher price tags. Maybe you've got the vision, enthusiasm, and a lot of good ideas to implement. Unfortunately, there are also a lot of variables in the business world, a number of which can, and do, lead to failure.

Reduce your risk. Don't spend every penny, struggle to keep things afloat, and then risk losing it all. Exercise common sense - spending less will reduce your risk. Additional mony can be used at a later stage to expand or grow the business, once you have a thorough understanding of what the business takes.

Obviously, every business purchase is situation and business specific. Therefore, it is difficult to determine how much should be spent.

Here are some general guidelines:

1. You need to consider all the factors. Don't overlook monthly cash flows, sufficient working capital, possible vendor finance, and professional fees.
2. Always keep some cash in reserve for that rainy day. Look at what could be your biggest contingencies, and manage this risk. This  will likely require putting away some cash reserves as a safeguard in those early, more vulnerable, years.
3. Initially, borrow more than you need, because if, in 12 months time, your new business is struggling and is in need of a cash injection, the bank is unlikely to want to lend you more. You could borrow additional funds but not draw on them, or establish a good overdraft facility at the time of purchase. Keep this in place until you're comfortable that you can financially manage your way through the ups and downs.
4. You're likely to be borrowing against assets. When doing this, look to maximise your borrowing against the new businesses assets - this may require using a finance company. It's always easier and cheaper to borrow against the family home - but it may not help you sleep easy.
5. You're also likely to need some bank financing. Banks are risk averse; they like houses and are nervous on businesses. Business borrowings are therefore likely to be secured against family homes (where possible), or other key assets. They will want your proposed business to be able to generate sufficient cash flow after expenses before they give you a loan. After all, they want to see you can meet your financial obligations. Banks are an important part of the equation.
   • (a) Banks will usually look at the interest cover. For example, (net profit + interest costs) / interest costs = interest cover.
     (Or, $30,000 + $16,000) / $16,000 = 2.8.)
     Anything less than 2 suggests the business has too much debt.
   • (b) Banks want security, and will usually lend only 45 - 65% on the tangible business assets' valuation, depending on the perceived risk in having to cash-up the particular asset. They will also want to see 3 years of trading trends, and are generally more comfortable lending to proven franchise systems, as this factor tends to improve a business's success.