Key Takeaway Table
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Benefits of Buying an Existing Business
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Unlike new businesses, an existing business will already have an established customer base, operational system, employee base, and supply chain. An existing business will also have a recognisable brand, making it easier to market once acquired.
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Financing Business Acquisition
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Businesses can apply for business acquisition loans from banks, non-bank lenders and private lenders. Banks will have strict criteria but lower rates and often longer loan terms. Meanwhile, private lenders may have less strict criteria but with higher rates. Businesses can apply for secured or unsecured loans to raise capital for business acquisition, depending on whether they have significant assets to use as security. Businesses can also access the equity of their existing assets through a second mortgage to fund the purchase of an existing business. Another way to finance business acquisition is through equipment finance, where the loan is secured against the equipment of the business being acquired.
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Things to Watch Out For
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If you’re looking to purchase an existing business, be wary of certain red flags, like debt, liabilities, operational challenges, high employee turnover rate, and more. Pay attention to why the business is being sold and how fast the seller wants to sell it. Ensure that the business will become an asset to you rather than a liability.
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What Lenders Look For
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For business acquisition loans, lenders will typically scrutinise the finances, credit history, and tax position of both the buyer and the business being purchased. Ideally, the lender needs to see that the new business will earn enough to ensure the buyer can repay the loan.
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Starting a new business from scratch may be exciting, but it’s also quite risky. Even though the majority of businesses in Australia are small to medium enterprises (SMEs), getting one off the ground is still a big challenge. The business failure rates are the highest they’ve ever been since the global financial crisis, with SMEs that just opened in 2019 already closing down.
For some, buying an existing business may be a safer decision than starting a new one. Whether you’re aspiring to be an entrepreneur or an existing business owner looking to expand, business acquisition can be a great move. The good news is that there are loan products available to help you make it happen.
Benefits of Buying an Existing Business
Business acquisition is overall less risky than starting an enterprise from the ground up. Here’s why:
Established Customer Base
An existing business will already have a customer base, which means you’ll get immediate revenue from ongoing sales. This is a significant advantage over a new business that needs to work hard and spend a lot to attract its first customers.
Existing Operational System
An existing business has operational systems, including accounting, management, and production. These systems can be complex and time-consuming to set up from scratch, so acquiring them ready-made can be a big plus.
Brand Recognition
If the business has been around for a while, it may have established brand recognition and a positive reputation. This can be valuable for maintaining and growing the business, as it takes time and resources to build a brand from nothing.
Immediate Cash Flow
An existing business might generate cash flow from day one, which is critical for covering operating costs and financing growth. In contrast, a new business might take months or years to become profitable.
Existing Employee Base
An existing workforce can be a significant asset, especially if the employees are experienced and knowledgeable about the business and its customers. Training a new team can be costly and time-consuming.
Established Supply Chain
An existing business likely has a supply chain and vendor relationships in place, which can ensure the smooth operation of the business and offer better terms due to long-standing relationships.
Things to Watch Out for When Acquiring an Existing Business
When buying a business, it’s important to exercise due diligence and scrutinise the business before making any decision. Here are some key factors you should watch out for:
- Financial Health: One of the most important factors to look at is the financial state of the business. Carefully review the financial statements, cash flow, assets, and liabilities of the business to see if the business is financially stable. Reviewing finances also ensures that you know you are paying the right price for the business.
- Reason for Selling: Business owners sell their business for many reasons. Some want to turn a profit, while some want to switch industries. Be wary of the reason why a business is being sold, especially if the seller is in a hurry. Watch out for any red flags as a rushed sale may be due to debt or other issues.
- Hidden Liabilities: Look for any hidden liabilities, such as undisclosed debts, pending lawsuits, or tax obligations. These can become unforeseen expenses after the purchase.
- Operational Challenges: Understand the day-to-day operational challenges the business faces. Issues like outdated processes, inefficient technology, or a disengaged workforce can impact future profitability.
- Employee Turnover: High employee turnover can indicate underlying issues such as poor management and overall work dissatisfaction.
- Compliance Issues: Ensure the business complies with all relevant laws and regulations. Non-compliance can lead to significant fines and legal trouble.
- Market Position and Reputation: Assess the business’s market position and reputation. Challenges such as a deteriorating brand image or increasing competition can hinder future growth.
- Future Growth Potential: Evaluate the realistic growth potential of the business. Does the business have the potential for growth and expansion?
Types of Business Acquisition Loans
Many lenders, whether traditional or alternative, offer loans for business acquisition. Banks will typically have more stringent criteria, often asking for both your financial documents and the documents of the business to be purchased. Once approved, you can enjoy lower interest rates, a longer loan duration, and overall better terms. Meanwhile, non-bank lenders including private lenders may have less strict criteria, giving opportunities even to those with less ideal credit standing. However, you may be asked to pay higher interest rates and be subject to less favourable terms.
Here are some loan types you can obtain to purchase a business:
Secured and Unsecured Loans
You can apply for secured and unsecured loans to purchase an existing business. If you have a significant property like commercial real estate or equipment, you can use it as security for the loan. If you have no significant assets, you can apply for an unsecured loan, but the lender will look at other criteria to ensure that you can repay the loan. You may be asked to provide a guarantee to help the lender avoid risk in the case of default.
Equity Loans
An equity loan or a second mortgage allows you to access the equity of existing property to raise funds. If you have real estate with significant equity built up, you can apply for first or second mortgage to get the capital you need to purchase an existing business.
Equipment Finance
(Secured Against The Plant & Equipment in The Acquired Business)
An equipment finance loan to raise capital can be used to acquire a business using the plant and equipment from the targeted acquisition. While usually not enough capital to purchase a business outright, combined with vendor finance, this is a loan type we’ve helped clients use to successfully acquire businesses. This best works with B2B business types like Civil Construction or Manufacturing type businesses given their larger levels of plant and equipment compared to B2C type businesses like retail or hospitality.
Loan Requirements for Buying a New Business
When you’re looking for business acquisition financing, lenders will require detailed information about both you and the business you intend to buy. If you already have a business, then the lender will look at its finances. Let’s look at the key pieces of information a bank will typically need to know (understanding unsecured lenders and private lenders may not need any other this information):
About The Borrower:
- Financial Statements: Lenders will look at your business’s profit and loss statements, balance sheets, and cash flow statements for the last few years to assess its financial health and stability.
- Personal Financial Information: Whether you’re a first-time business owner or not, lenders may ask for your personal financial information, including personal tax returns, financial statements, and personal credit scores.
- Credit History: Lenders will keep an eye on your business’s credit history to evaluate your past behaviour in managing debt.
- Tax Portals & Returns: Banks and Unsecured Lenders will usually wish to review your ATO ICA and ITA portals to assess your tax position. You may also be asked for your business’s most recent tax returns.
- Security: If applicable, the lender will ask for ownership documents, like a rates notice, of the property or asset you’ll be using as security.
About the Business You're Trying to Buy:
- Financial Statements: The lender may need to see the business’s profit and loss statements, balance sheets, and cash flow statements for the past few years to evaluate the financial performance and health of the business.
- Asking Price Justification: Lenders can ask for an explanation of how the asking price was determined, including any valuations or appraisals that were performed.
- Cash Flow Forecast and Projections: Lenders may ask for a detailed plan for the future cash flow of the business under your management, including how you intend to grow the business and projections for revenue, expenses, and forecasted profit.
- Asset Inventory: Lenders will need to look at a detailed list of the business’s assets, including physical assets, inventory, intellectual property, and more.
