Business acquisition loans, explained

Buying an established business can be faster and less risky than starting one, but it’s often harder to finance than people expect. The reason is goodwill. This entry explains how lenders look at acquisitions, how buyers typically bridge the goodwill gap and what to build into the purchase contract.

Why is buying a business harder to finance than buying equipment?

A small business’s price usually has three parts:

Component	What it is	How lenders view it
Tangible assets	Equipment, vehicles, fit-out	Can often be financed against the assets
Stock	Inventory at settlement	Sometimes funded, usually at a discount
Goodwill	Customers, name, systems, location	Hard to lend against on its own

Goodwill often makes up most of the price, and it has no resale value if the business fails. Lenders therefore look for other comfort before funding it: the buyer’s own money, property security, strong and verifiable cash flow, or a seller willing to carry part of the price.

How do lenders assess an acquisition?

They look at two businesses — the one being bought and the person or entity buying it:

• The target’s track record. Two or three years of financials, recent BAS and year-to-date results. business.gov.au recommends buyers themselves review three to five years of records where available.
• Sustainability of earnings. Would the profit survive a change of owner? Businesses built around the seller’s personal relationships are riskier.
• The buyer’s experience. Industry experience or a strong management plan reassures lenders.
• The buyer’s contribution. Cash, equity or both.
• Serviceability. Whether the business’s cash flow can meet the new repayments, after a realistic wage for the new owner. See serviceability.
• Security. Property, a general security agreement over the business, and personal guarantees.

How do buyers fill the gap?

A typical small-business acquisition combines several sources:

1. Buyer’s contribution — savings or equity from another asset.
2. Property-secured loan — using a home or investment property to fund part of the goodwill.
3. Equipment finance — for vehicles and machinery included in the sale.
4. Vendor finance — the seller receives part of the price over time.
5. Working capital facility — so the business isn’t starved of cash in the first months.

Splitting the purchase by component often produces a better overall result than forcing it into one loan. If you’re lining up a purchase, you can have a specialist map out the structure before you sign.

What should be in your due diligence?

The business.gov.au guide to buying a business suggests checking licences and permits, lease terms and landlord consent to transfer, equipment condition, stock, intellectual property, and outstanding debts and liabilities — including anything registered on the Personal Property Securities Register. A PPSR search shows whether assets you’re buying are already subject to someone else’s security interest. See PPSR and GSAs.

What should the contract include?

• A finance condition with enough time for the lender to assess the target.
• Access to records so you and the lender can verify the figures.
• Handover and training from the seller, which lenders like to see.
• Restraint of trade preventing the seller competing nearby.
• Clear treatment of stock, employees’ entitlements and debts at settlement.

What happens to the business’s existing debts?

In a typical asset sale, the buyer acquires the business’s assets and goodwill but not its debts, which the seller clears at or before settlement. That’s why a PPSR search matters: any security interest registered over equipment or stock needs to be released, or the buyer could take the assets subject to someone else’s claim.

In a share sale, where you buy the company itself, its existing debts, tax position and contracts come with it. Lenders look even more carefully at share purchases, and thorough due diligence on tax lodgements, employee entitlements and supplier accounts becomes essential. Your accountant and lawyer can advise on which structure suits the deal.

Do franchises work differently?

Franchise purchases follow similar principles but add the franchisor’s track record to the assessment. Some lenders are more comfortable funding a franchise in a well-established system. Our franchise finance guide covers the differences, including the disclosure document you must receive before signing.

Worked example (illustrative)

Illustrative only. A mechanic with ten years’ industry experience wants to buy an established workshop for $650,000: $150,000 in equipment, $40,000 in stock and the rest goodwill. He has $100,000 saved and owns a home with good equity.

The structure: equipment finance for the hoists and diagnostic gear, his savings towards the price, and a second mortgage over his home for most of the goodwill. The seller agrees to vendor finance for a small portion over two years and to stay on for a month of handover. The lender reviews the workshop’s financials and is comfortable the earnings will carry the combined repayments.

Buying a business? Get the funding structure right first.

The right mix of finance can be the difference between a purchase that works and one that strains from day one. Our enquiry takes about 60 seconds and there’s no credit check when you first enquire. We don’t pass your details to a queue of lenders — a real person looks at the deal and calls you. Please include the purchase price, what’s included and any property you could offer, as accurately as you can, so we can match you properly first time.

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