Key Takeaways
-
Lenders usually assess the buyer’s contribution, security, experience and the business’s cash flow. Requirements vary by lender and transaction.
-
Vendor finance, equipment finance and property-secured loans can sit alongside a standard acquisition loan.
-
An SMSF may have a role where premises form part of the transaction, but the rules require specialist advice.
-
Pre-approval is not approval for the specific business. Have a solicitor draft any finance condition to match the lender’s process.
-
Budget for stock, working capital, advisers’ fees and any transfer duty in addition to the purchase price.
Most buyers fund a business purchase with a combination of their own funds and borrowed money. The structure affects what you can afford, the conditions in the contract and the cash flow the business must support after settlement.
Understanding how lenders assess an acquisition helps you set a realistic budget before you review listed businesses or make an offer.
Your Finance Options
Business acquisition finance often combines more than one source. Options to discuss with your lender or finance broker include:
Bank Acquisition Loans
Some banks and other lenders offer loans for buying an established business. Because the business’s earnings are expected to service the debt, the lender will usually review its trading history and whether the price is supported by verified earnings.
Property-Secured Loans
Equity in a home or investment property can be offered as security for a business purchase. Secured lending may offer different rates and limits from unsecured facilities, depending on the lender and your circumstances.
The trade-off is that the property is at risk if the loan is not repaid. Obtain advice before offering personal assets as security.
Unsecured Loans
Some non-bank lenders offer unsecured business loans with simpler documentation. Pricing, limits and terms vary, so compare the total cost and repayment obligations before relying on this form of funding.
Equipment Finance
Where plant and equipment forms part of the sale, such as commercial kitchen equipment, vehicles or fit-out items, some of it may be financed separately against the asset. Confirm which assets are included in the sale and whether any are already under finance or subject to a security interest.
Vendor Finance
Under vendor finance, the seller agrees to receive part of the price after settlement. It can reduce the funds needed upfront, but it leaves the seller carrying risk until the balance is paid.
Have a solicitor document the amount, interest, security, repayment schedule and default terms, and confirm with your lender whether vendor finance affects its assessment.
Self-Managed Super Funds
A self-managed super fund (SMSF) may be able to acquire business real property, such as the premises a business trades from, subject to strict rules. Using super to buy an operating business that you or a related party will run raises separate compliance questions. Obtain specialist SMSF advice before including super in any funding plan.
What Lenders Assess
Lenders consider the business and the buyer together. Prepare information on:
-
Business financials, including profit and loss statements, tax returns, Business Activity Statements (BAS) and bank statements, with any earnings adjustments explained and supported.
-
Your experience, including relevant industry or management background.
-
Your contribution, including the amount and where it comes from.
-
Security, such as property, business assets, a general security agreement or personal guarantees.
-
Serviceability, meaning whether the verified earnings can meet repayments after a realistic wage for the person running the business.
-
The lease, including the remaining term, options and rent.
Criteria differ between lenders, so ask each lender or broker what they will require for the business you are considering.
Deposit and Contribution
Lenders generally expect the buyer to contribute part of the purchase price. There is no single percentage that applies to every transaction. A lender may ask for a larger contribution where goodwill makes up much of the price or available security is limited.
Your contribution may come from savings, property equity or, in some structures, vendor finance that the lender accepts. Confirm how the lender will treat each source before you commit to a price.
Pre-Approval and Finance Conditions
Speaking with a lender before making an offer can help you understand your likely borrowing range. Pre-approval is not approval for the particular business. The lender will usually need to assess the contract, lease and financial records before giving formal approval.
Ask your solicitor whether the contract should include a finance condition and how long it should allow. The period should reflect the lender’s process, the due diligence timetable and any landlord or licence approvals. Do not assume a lender’s timeframe without confirming it.
Working With a Finance Broker
A commercial finance broker can help identify lenders that assess business acquisitions in your sector and prepare the application. Ask about their experience with business purchases specifically, how they are paid and which lenders they will approach.
Costs Beyond the Price
The purchase price is only part of the funding required. Your budget may need to cover:
-
Stock, where it is payable in addition to the price under the contract.
-
Working capital to cover wages, rent and suppliers while the business settles under new ownership.
-
Legal fees for the contract, due diligence and lease assignment.
-
Accounting and finance broker fees.
-
Transfer duty, which may apply to Queensland business assets, including goodwill.
-
Lease assignment costs, landlord consent fees and any bond or bank guarantee for the premises.
The amounts depend on the business and the transaction, so ask your advisers to help prepare a full budget before you make an offer.
Build Your Funding Plan
Confirm your contribution, security and borrowing capacity before you commit to a price. Keep your lender, accountant and solicitor informed as the contract, due diligence and approvals progress.
Once your finance position is clear, Bond Business Brokers can show you current listings that suit your budget.
Common Questions
Can I buy a business with no money down?
It is uncommon. Some transactions combine vendor finance with a loan, but lenders and sellers generally expect the buyer to contribute funds. Discuss the options with your lender and solicitor.
Can I use equity in my home to buy a business?
Some lenders accept residential property as security for a business purchase. The property is then at risk if the loan is not repaid, so obtain financial and legal advice before offering it.
Does transfer duty apply to a business purchase?
Transfer duty may apply to Queensland business assets, including goodwill. Ask your solicitor or accountant to confirm the position for your transaction and include any duty in your budget.
This article provides general information only. Obtain advice from appropriately qualified advisers about your circumstances before entering into a transaction or relying on tax, legal or regulatory information.