Funding The Acquisition
Buying an established business can create an opportunity to step into ownership, expand an existing operation or acquire an established customer base.
But finding the right business is only part of the process.
You also need to understand whether the acquisition can be financed, how much you may need to contribute and whether the proposed structure will leave the business with enough cash to operate after settlement.
Fairlane Finance is a Sydney-based commercial finance adviser helping Australian business buyers assess, structure and arrange finance for business acquisitions.
What is business acquisition finance?
Business acquisition finance is funding used to purchase all or part of an existing business.
Depending on the transaction, funding may be required for:
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the business purchase price;
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goodwill;
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equipment and vehicles;
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stock or inventory;
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professional and transaction costs; and
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working capital after settlement.
The acquisition may be funded through one loan or a combination of buyer funds, acquisition finance, property-supported lending, equipment finance, vendor finance, deferred consideration or external investment.
The appropriate structure depends on the buyer, the business being purchased and the complete transaction.
What will a lender assess?
A business acquisition loan is different from a home loan. The lender is not assessing only the borrower and an asset.
It will generally consider three interconnected elements.
1. The buyer
The lender may consider the buyer’s financial position, credit history, available contribution, relevant experience and ability to operate the business after settlement.
A first-time owner may still have valuable industry, management or professional experience.
2. The business
The lender may review the business’s historical financial performance, sustainable cash flow, assets, goodwill, customers, suppliers, employees and dependence on the departing owner.
The seller’s reported profit is not automatically the amount a lender will accept as sustainable earnings.
3. The transaction
The lender may also consider the purchase price, buyer contribution, available security, proposed ownership structure, vendor-finance terms, working-capital requirement and transition arrangements.
Two businesses with the same purchase price can produce very different finance outcomes.
How can a business purchase be funded?
A business acquisition may involve several funding sources.
Business acquisition loan
A bank, non-bank lender or specialist commercial lender may provide part of the purchase price, subject to its assessment of the complete transaction.
Property-supported finance
Available property equity may support part of the acquisition funding. Property security can assist an application, but it does not automatically make an unsuitable transaction financeable.
Equipment finance
Vehicles, machinery or other eligible equipment may sometimes be financed separately from the main acquisition loan.
Vendor finance
The seller may agree to receive part of the purchase price after settlement. The senior lender will generally need to understand and accept the proposed vendor-finance terms.
Deferred consideration or earn-out
Part of the purchase price may be paid later or calculated according to the business’s performance after settlement.
Buyer or investor funds
The structure may include the buyer’s own contribution or capital provided by another investor in exchange for an ownership interest.
Working-capital finance
A separate facility may be required to support wages, suppliers, inventory and other operating expenses after the acquisition.
How much of my own money will I need?
There is no standard deposit that applies to every business acquisition.
The required contribution may depend on:
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the business’s sustainable earnings;
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the purchase price;
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the industry;
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the assets and goodwill being acquired;
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the buyer’s experience and financial position;
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available property or business-asset security;
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vendor finance or deferred consideration;
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lender policy; and
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the working capital required after settlement.
The buyer should consider both the money required to purchase the business and the funds needed to operate it afterwards.
Assess the finance before making binding commitments
A preliminary assessment can help identify possible funding constraints before the buyer signs an unconditional contract.
An early discussion may help clarify:
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how lenders may view the buyer and business;
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whether the proposed purchase price may be difficult to support;
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how much the buyer may need to contribute;
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whether additional security could be required;
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how vendor finance may need to be structured;
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whether enough working capital has been allowed for; and
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what information a lender may require.
A preliminary assessment is not a formal approval, business valuation or substitute for financial, legal, accounting or taxation advice.
How Fairlane Finance can help
Fairlane Finance is a Sydney-based commercial finance adviser helping Australian buyers assess, structure and arrange finance to purchase established businesses.
We consider the buyer, the business and the proposed transaction to identify potential funding constraints before commitments are made. We then explore an appropriate structure, which may include acquisition finance, buyer funds, property-supported lending, equipment finance, vendor finance and working capital.
Where the transaction is suitable to progress, we approach relevant lenders and support the application through assessment, approval conditions and documentation.
Buying your first business?
Your first acquisition can raise different questions about experience, buyer contribution, security and working capital.
Our complimentary First-Time Business Buyer Guide explains what lenders may assess, how the funding could potentially be structured and what to consider before making binding commitments.
