Question 1

Can I borrow money to buy an existing business in Australia?

Accepted Answer

Yes. Finance may be available to fund the purchase of an established business, although the amount and structure will depend on the buyer, the business being acquired and the transaction.Lenders may consider factors such as the business's historical earnings and cash flow, the buyer's experience, the purchase price, available security, the buyer's contribution and the proposed ownership structure.Business acquisition finance is therefore assessed differently from a standard home loan. The strength of both the buyer and the business being acquired can be important.

Question 2

How much of a business purchase can a lender finance?

Accepted Answer

There is no universal lending percentage for a business acquisition. The amount available may depend on sustainable business earnings, the purchase price, tangible assets and goodwill, industry risk, buyer experience, available security, the buyer's contribution and the cash that will remain after settlement. A lender may also consider whether the total proposed debt can be serviced after allowing for working capital and other commitments. The purchase price alone does not determine the loan amount, and different lenders may assess the same transaction differently.Read our guide to funding options when buying a business with a smaller contribution.

Question 3

Can I buy a business without using my home as security?

Accepted Answer

Yes, potentially.  Property security can improve the funding options available for some acquisitions, but not every business purchase needs to be secured against the buyer's home or other real estate.Depending on the transaction, funding may potentially be structured around the business's assets and cash flow, commercial property, other security, vendor finance or different forms of business lending.  Whether this is feasible depends heavily on the business being purchased, the transaction structure and the financial position of the buyer.

Question 4

Can I get finance to buy my first business?

Accepted Answer

Yes, first-time business buyers can potentially obtain acquisition finance.Not having previously owned a business does not automatically prevent someone from obtaining finance. However, lenders are likely to consider whether the buyer has the skills and experience required to operate the particular business successfully.Relevant industry experience, management experience, transferable skills, financial capacity and a credible plan for transitioning into ownership can therefore become particularly important for first-time buyers.

Question 5

Do I need experience in the industry of the business I am buying?

Accepted Answer

Not necessarily, but relevant experience and the ability to operate the business successfully can make a significant difference.A lender may consider your industry knowledge, management experience, transferable skills and ability to operate the business after the existing owner leaves.For example, someone buying a specialised business without relevant experience may present greater transition risk than someone who has worked in that industry for many years.Where experience is limited, factors such as the vendor's transition arrangements, existing management team and the buyer's transferable skills may become more important.

Question 6

How do lenders assess a business acquisition?

Accepted Answer

Lenders generally assess both the buyer and the business being purchased.Depending on the transaction, they may consider:historical and sustainable business earningscash flow and debt-servicing capacitypurchase price and valuationbuyer experience and financial positioncustomer and supplier concentrationreliance on the existing ownerindustry riskstangible assets and goodwillavailable securitybuyer contributionproposed ownership and transaction structureworking capital requirements after settlementA profitable business is therefore not automatically a financeable acquisition. The lender needs to be comfortable with the transaction as a whole.

Question 7

What financial documents will I need when applying for finance to buy a business?

Accepted Answer

Requirements vary, but lenders commonly want to understand both the financial history of the target business and the buyer's financial position.Documents may include historical profit and loss statements and balance sheets, recent management accounts, business tax returns, BAS statements, bank statements, an Information Memorandum or business sale information, details of the proposed purchase and information about the buyer's assets, liabilities, income and experience.Additional information may be required depending on the business, lender and funding structure.

Question 8

How many years of financial statements do lenders look at when financing a business purchase?

Accepted Answer

Lenders will generally want sufficient historical information to determine whether the earnings of the business are sustainable.For established businesses, several years of financial statements may be requested, together with more recent trading information.The lender will not necessarily treat every historical year equally. Recent performance, unusual expenses, changes in revenue, one-off events and the future sustainability of earnings can all influence the assessment.

Question 9

What are add-backs or normalised earnings when buying a business?

Accepted Answer

Business sale documents often adjust reported profit to produce what may be described as normalised earnings, adjusted earnings or add-backs.These adjustments may remove expenses the seller believes will not continue under the new owner, such as certain owner-specific or one-off costs.However, a buyer, accountant and lender may not necessarily accept every adjustment made by the seller.  Understanding how the advertised earnings have been calculated is therefore important when assessing both the value of the business and its capacity to support acquisition debt.

Question 10

Can goodwill be financed when buying a business?

Accepted Answer

Yes, possibly.  Many businesses derive a substantial part of their value from goodwill rather than physical assets. Examples can include professional practices, service businesses and other asset-light businesses.Financing goodwill can be more complex because there may be fewer tangible assets available as security.  Lenders may therefore place greater emphasis on sustainable cash flow, customer retention, buyer experience, industry characteristics and the overall strength of the acquisition.

Question 11

How long does finance take when buying a business?

Accepted Answer

There is no standard timeframe for business acquisition finance. The process can depend on the lender, the complexity of the acquisition, the quality and completeness of the information provided, valuation or security requirements, legal documentation and whether the transaction changes during negotiations. A straightforward proposal with complete records may progress faster than a transaction involving multiple entities, unusual security or unresolved due diligence. Buyers should allow adequate time for assessment, approval, documentation and settlement, and obtain legal advice before agreeing to finance deadlines.

Question 12

Can vendor finance help me get a business acquisition funded?

Accepted Answer

Yes, vendor finance can sometimes help make a business acquisition financeable.Vendor finance can reduce the amount of cash or external debt required at settlement and may also demonstrate that the seller retains some confidence in the business and its future performance.However, lenders may have specific requirements regarding vendor finance, including repayment terms, priority and whether repayments can occur while the senior loan remains outstanding.Vendor finance should therefore be considered as part of the overall acquisition structure rather than simply treated as a substitute for a buyer contribution.Occasionally, a vendor may be willing to finance most or even all of the purchase price, particularly where they have strong confidence in the buyer and the proposed transition. However, this is uncommon and would generally require the buyer and vendor to negotiate an appropriate structure and terms.

Question 13

How does customer concentration affect financing a business acquisition?

Accepted Answer

A business that depends heavily on one or a small number of customers can present additional risk.If a major customer leaves after settlement, revenue and cash flow may fall significantly, potentially affecting the buyer's ability to service acquisition debt.Lenders and buyers may therefore consider the proportion of revenue generated by major customers, the length and strength of those customer relationships, contractual arrangements and historical customer retention.

Question 14

Does the purchase price of a business affect how much I can borrow?

Accepted Answer

Yes, but the purchase price is only one part of the assessment.A lender may consider whether the price is reasonable relative to the business's earnings, assets and overall risk. In some transactions, an independent valuation may also be required.Paying more for a business does not automatically mean a lender will provide more finance. If the purchase price increases without a corresponding increase in sustainable earnings or value, the buyer may need to contribute more capital.

Question 15

Can I finance an asset-light business with few physical assets?

Accepted Answer

Yes, it is possible to finance an asset-light business with few physical assets.   Many service businesses, professional practices and online businesses derive much of their value from cash flow, customers, intellectual property or goodwill rather than physical assets.Where there is little equipment, property or other tangible security, lenders may place greater emphasis on sustainable earnings, customer retention, buyer experience and the ability of the business to continue performing after the ownership transition.Asset-light businesses can potentially be financed, but the funding structure and lender assessment may differ from an acquisition supported by substantial tangible assets.

Question 16

What can cause finance for a business acquisition to fall through?

Accepted Answer

Problems can arise even where the business appears profitable.Potential issues can include insufficient sustainable cash flow, an unrealistic purchase price, inadequate buyer contribution, limited security, customer concentration, weak financial records, declining trading performance, limited buyer experience or excessive dependence on the departing owner.The proposed transaction structure can also create difficulties.This is one reason assessing the financeability of an acquisition early in the process can be valuable.

Question 17

Can I get 100% finance to buy a business?

Accepted Answer

In some circumstances, a business acquisition may be financed without the buyer contributing a conventional cash deposit, but this is not the norm.  Whether this is possible depends on the strength of the business, available security, the buyer's financial position and experience, vendor finance and the overall transaction structure.For example, additional property or other acceptable security may sometimes support a higher level of funding. Vendor finance may also form part of the acquisition structure.However, buyers should be cautious about assuming that a profitable business automatically qualifies for 100% finance. The lender will assess the transaction as a whole and will generally want to understand how risk is being shared between the parties. In many cases, lenders will want to see that the buyer has meaningful financial exposure to the transaction, particularly because the buyer will ultimately control the business and its future performance.

Question 18

Can I get pre-approved for finance before I find a business to buy?

Accepted Answer

Unlike a residential home loan, there is generally no true pre-approval for business acquisition finance before you have identified the business you want to buy.This is because the lender is assessing not only you as the borrower, but also the business being acquired. Its earnings, cash flow, industry, purchase price, assets, risks and other characteristics can materially affect whether the acquisition can be financed and on what terms.However, you can still undertake a preliminary finance assessment before finding a business. This can help you understand your financial position, likely contribution, available security and the approximate size and types of acquisitions that may be realistic for you.Once you identify a specific business, the lender can then assess the actual acquisition and determine whether finance can be approved.

Question 19

How is a business acquisition loan different from a home loan?

Accepted Answer

Business acquisition finance works very differently from a residential home loan.With a home loan, the lender primarily assesses the borrower, their ability to repay the loan and the property being offered as security. When financing a business acquisition, the lender also needs to assess the business being purchased and the transaction itself.This means business acquisition finance can involve different expectations around buyer contribution, security, business experience, cash flow, valuations, timeframes, fees and transaction structure. There is also generally no equivalent of a residential home-loan pre-approval before a specific business has been identified.Read our guide to the key differences between home loans and business acquisition finance.

Question 20

How do I get a loan to buy a business in Australia?

Accepted Answer

In assessing a funding application to buy a business, a lender or bank may examine the buyer’s experience and financial position, the business’s sustainable cash flow, the purchase price, available security and the complete funding structure.   Thus the first step is to typically to assess the buyer, the business and the proposed transaction together.  A Commercial Finance Adviser at Fairlane Finance can help assess the proposal and identify potentially suitable lenders.

Question 21

Can I buy a business with a small deposit?

Accepted Answer

It may be possible in limited circumstances, but a smaller cash contribution generally requires other strengths within the transaction. These might include acceptable property or business-asset security, vendor finance, investor capital, strong sustainable cash flow or a particularly capable buyer. Every additional funding component creates its own obligations, costs and risks. The buyer must also consider professional costs and working capital after settlement. A structure that funds the purchase price but leaves the business without adequate liquidity may not be sustainable.Read our guide to funding options when buying a business with little money.

Question 22

Can I use the business’s cash flow to repay the acquisition loan?

Accepted Answer

The acquired business's sustainable cash flow may be central to the lender's assessment and can be the intended source of loan repayments. However, the seller's advertised profit is not automatically the amount available for debt service. The lender may adjust earnings for unsupported add-backs, replacement wages, tax, capital expenditure, working-capital requirements, existing commitments and other proposed debt. Repayments may also be tested under a downside scenario. Buyers should independently investigate whether the business can support both normal operations and the proposed finance.Read about assessing cash, debt and post-settlement liquidity when buying a business.

Question 23

Which lenders provide business acquisition finance?

Accepted Answer

Business acquisition finance may be available from major banks, regional and second-tier banks, non-bank commercial lenders, specialist cash-flow lenders and, for some larger or more complex transactions, private-credit providers. Lender appetite can differ by industry, loan size, buyer experience, available security, goodwill exposure and the strength of sustainable earnings. There is no single lender that is suitable for every acquisition. A finance broker can assess possible lender and facility options, but does not determine whether the acquisition itself is an appropriate investment.Read how lenders may price business acquisition finance.

Question 24

What determines business-acquisition loan interest rates in Australia?

Accepted Answer

There is no universal interest rate for a business-acquisition loan in Australia. Pricing may depend on the buyer's financial position and experience, the business's sustainable earnings, the loan amount and term, available property or business-asset security, industry risk, transaction structure and the lender's policy. Secured and unsecured components may be priced differently. The rate should be considered together with fees, repayment frequency, loan term, required contribution, security and total dollar cost. A lender will generally need information about the particular acquisition before meaningful pricing can be assessed.Read what may determine business acquisition loan pricing.

Question 25

What fees and costs can apply to acquisition finance?

Accepted Answer

Acquisition finance may involve costs in addition to interest. Depending on the lender and transaction, these can include application or establishment fees, valuation fees, lender legal costs, security-registration costs, documentation fees, annual review or facility fees and costs associated with professional advice. The acquisition itself may also require accounting, legal, due-diligence and other transaction expenses that are not lender charges. Buyers should consider the total cash required before and at settlement, ongoing facility costs and any early-repayment or refinancing costs, rather than budgeting only for the purchase price and headline interest rate.Read why the interest rate is only one part of an acquisition finance structure.

Question 26

Can acquisition finance cover stock, equipment and working capital?

Accepted Answer

Potentially. A business-acquisition funding structure may include amounts for stock, equipment and post-settlement working capital as well as part of the purchase price. Different components may be financed through different facilities because equipment, inventory, goodwill and working capital have different characteristics and forms of security. The lender may require the buyer to contribute capital and retain liquidity after settlement. Buyers should calculate the complete acquisition and transition budget, including professional costs, repairs, replacement equipment, seasonal requirements and contingencies, rather than assuming the advertised purchase price represents the total cash required.Read why purchase price and total cash required should be assessed separately.

Question 27

How does the business lease affect acquisition finance?

Accepted Answer

The premises lease can be important because the acquired business may depend on remaining at its location for long enough to generate the earnings needed to repay the loan. A lender may examine the remaining lease term, renewal options, rent, rent reviews, assignment conditions, landlord consent, security deposits, fit-out obligations and make-good provisions. A short or uncertain lease may create additional risk, particularly for a location-dependent business. Buyers should obtain legal advice on the lease and confirm that assignment or a new lease can be completed as required for settlement and finance.

Question 28

Does an asset purchase or share purchase affect the finance structure?

Accepted Answer

Yes. An asset purchase involves acquiring specified business assets and may include goodwill, equipment, stock and particular contracts. A share purchase involves acquiring ownership of the company that operates the business, potentially together with its existing assets, liabilities and obligations. The structure can affect the borrower, security, valuation, due diligence, documentation and the way funds are applied at settlement. Lenders may assess the two structures differently. The buyer should obtain independent legal, accounting and tax advice before deciding on a transaction structure, as a finance broker does not determine which structure is appropriate.

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