Question 1

How much money do I need to buy a business?

Accepted Answer

There is no standard deposit required when buying a business.The amount you need to contribute can depend on the purchase price, business profitability, industry, available security, your experience and the lender's appetite for the transaction.However, lenders will commonly want to see a meaningful contribution from the buyer so that the buyer shares some of the financial risk and has sufficient "skin in the game".That said, a business that costs $1 million does not necessarily mean you simply need a particular percentage as a deposit. The entire transaction needs to be assessed.You should also consider costs beyond the purchase price, including professional fees, due diligence, legal costs and sufficient working capital after settlement.

Question 2

Should I arrange finance before making an offer on a business?

Accepted Answer

It is generally useful to explore the likely finance position before making an offer or becoming unconditionally committed. A preliminary assessment can identify potential constraints involving buyer contribution, security, lender appetite, repayment capacity and the total funding requirement. Final approval will usually require detailed information about the particular business and transaction, so an early discussion is not a guarantee of finance. Buyers should obtain legal advice about finance conditions, due-diligence clauses and settlement timeframes before signing a contract.

Question 3

When should I speak to a commercial finance broker about buying a business?

Accepted Answer

Ideally, early in the acquisition process and before becoming unconditionally committed to the purchase.You do not necessarily need to wait until you have signed a contract. A preliminary discussion can take place while you are still assessing the opportunity.  Early involvement can help identify potential funding constraints, possible transaction structures and the information lenders are likely to require before deadlines become critical.

Question 4

What is vendor finance when buying a business?

Accepted Answer

Vendor finance occurs when the seller agrees to receive part of the purchase price after settlement rather than receiving the entire amount upfront.For example, a buyer may contribute some capital, a lender may provide acquisition finance and the vendor may agree to defer payment of another portion of the purchase price.Vendor finance can sometimes help bridge a funding gap, but its terms need to work alongside the senior lender's requirements and should be properly documented with appropriate legal advice.

Question 5

What is working capital and why do I need it when buying a business?

Accepted Answer

Working capital is the money available to meet the ongoing operating requirements of a business, such as suppliers, wages, rent, inventory and other short-term expenses.A common mistake is to focus entirely on funding the purchase price.If a buyer uses most of their available cash to complete the acquisition, the business may be left with insufficient liquidity immediately after settlement.  The funding strategy should therefore consider both the money required to buy the business and the money required to operate it afterwards.

Question 6

Why does dependence on the existing owner matter when buying a business?

Accepted Answer

A business may appear highly profitable while still depending heavily on the existing owner's relationships, technical knowledge, sales ability or day-to-day involvement.If those capabilities disappear when the business is sold, historical earnings may not necessarily continue under the new owner.Buyers and lenders therefore need to understand what the existing owner actually does, how easily those responsibilities can be transferred and what transition support will be provided after settlement.

Question 7

What professionals should I speak to before buying a business?

Accepted Answer

A business acquisition often involves several professional disciplines.Depending on the transaction, a buyer may need assistance from an accountant, commercial lawyer, commercial finance broker and other specialist advisers.The business broker or selling agent generally facilitates the sale process and should not replace the buyer's independent professional advisers.Finance, legal due diligence, financial due diligence, taxation and transaction structure can interact, so involving the appropriate advisers early can help identify problems before the buyer becomes committed.Australian Government guidance: buying an existing business.

Question 8

Can I buy a business and keep my existing job?

Accepted Answer

Potentially, but it depends on the business and the proposed ownership arrangement.Some businesses can operate with limited owner involvement, while others require substantial day-to-day involvement from the owner.A lender may want to understand who will operate the business after settlement, whether the buyer's proposed involvement is realistic and whether additional management or staffing costs need to be allowed for.Buyers should be particularly careful about assuming that the hours worked by the existing owner will automatically apply to them after taking over the business.

Question 9

What should I check before buying an existing business?

Accepted Answer

The appropriate due diligence depends on the business, but buyers generally need to understand considerably more than the advertised revenue and profit.Important areas can include financial performance, customer concentration, recurring revenue, contracts, employees, leases, suppliers, licences, working capital, taxation, legal obligations, owner dependence and the reason for the sale.Buyers should also understand how the seller's advertised earnings have been calculated and whether those earnings are likely to continue after ownership changes.Independent legal, accounting and other professional advice should be obtained where appropriate.Australian Government guidance: buying an existing business.

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