You’ve found a business for sale.
It’s established, has customers, employees, equipment and years of trading history.
The asking price is $650,000.
You have a deposit available and start looking at whether the remaining purchase price can be financed.
But $650,000 may not be the amount you actually need to complete the acquisition and keep the business operating afterwards.
There may be stock to purchase.
Employee entitlements or other settlement adjustments need to be understood.
Equipment may be financed separately.
Professional costs need to be paid.
And after settlement, the business still needs enough money in the bank to fund wages, suppliers and everyday expenses.
For buyers around Ballarat considering an established business, the finance conversation should start with what you’re actually buying and how much capital the business needs on day one under your ownership.
Start by Breaking Down the Purchase Price
A business sale isn’t necessarily one single asset.
The agreed price may include different components such as:
goodwill
plant and equipment
vehicles
furniture and fittings
intellectual property
other business assets
Stock may be included in the agreed price or calculated separately at settlement.
The actual structure depends on the transaction.
Ask the selling agent, accountant and solicitor to help you understand exactly what is included.
From a finance perspective, this matters because lenders may treat different components of an acquisition differently.
What Are You Actually Paying for?
Imagine two businesses are both offered for $600,000.
Business A includes $400,000 of identifiable equipment and $200,000 attributed to goodwill and other business value.
Business B has relatively little tangible equipment and most of the value is goodwill.
Those are very different finance transactions.
Tangible assets may potentially support asset finance.
Goodwill doesn’t work the same way.
The amount of tangible security within the transaction can influence the funding structures and lenders that may be considered.
Don’t look only at the total price.
Understand what’s underneath it.
What Is Goodwill?
Goodwill broadly represents value in the business beyond its identifiable physical assets.
That may relate to the established customer base, reputation, systems, location, recurring work and other commercial advantages associated with an operating business.
You can’t drive goodwill away like a truck.
You can’t identify it with a serial number like a machine.
That means financing a purchase heavily weighted towards goodwill can require a different lending approach from financing equipment.
The business’s historical and expected performance becomes particularly important.
Don’t Assume the Seller’s Profit Number Is Your Profit
A business-for-sale advertisement may show an attractive profit figure.
Understand how it was calculated.
Is it EBITDA?
Adjusted EBITDA?
Net profit?
Owner’s earnings?
Is the owner’s wage included?
Have personal or one-off expenses been added back?
Are there related-party expenses?
What adjustments have been made?
Your accountant should review the financial information and help you understand the earnings of the business.
A broker can look at how lenders may assess the finance application, but we’re not replacing financial, accounting or valuation advice.
Look at Several Years, Not One Excellent Year
One strong year can make a business look attractive.
But what happened before that?
Has revenue been growing steadily?
Are margins stable?
Was the latest year unusually strong?
Did one large contract distort the result?
Has revenue started falling?
Where appropriate, look at multiple periods and current trading.
Lenders may also want to understand historical and recent performance.
A business purchase is based partly on what you expect to happen in the future, but the historical numbers help show what you’re actually buying.
How Dependent Is the Business on the Current Owner?
This can be one of the most important acquisition questions.
Imagine you’re buying a business because it produces excellent profit.
Then you discover the current owner personally generates most of the sales, holds the key customer relationships and performs work nobody else in the business can do.
What happens when that owner leaves?
A business that operates through established employees, systems and diversified customer relationships may transfer very differently from one built entirely around the seller.
Ask:
What does the owner actually do every day?
Then decide who does those things after settlement.
Customer Concentration Matters
Suppose the business has $4 million in annual revenue.
That sounds substantial.
Then you discover one customer contributes $2.5 million.
Now the risk looks different.
If that customer leaves after the acquisition, the financial position can change dramatically.
Understand how revenue is distributed.
Are there many customers?
A handful?
One major contract?
If important contracts exist, understand whether they continue after a change of ownership and obtain appropriate legal advice about the transaction.
What About the Lease?
If the business operates from leased premises, the lease can be critical to what you’re buying.
A successful retail, hospitality, medical, manufacturing or service business may depend heavily on its location.
How long remains on the lease?
Are there options?
What is the rent?
How are increases calculated?
Does the landlord need to approve an assignment?
Are there guarantees or security requirements?
Your solicitor should review the lease and advise you.
Financing a business with a short or uncertain occupancy position can be very different from buying one with appropriate tenure for the intended ownership period.
Stock Can Create a Surprise at Settlement
The business is advertised for $500,000 plus stock.
You focus on financing the $500,000.
Then the stocktake shows $140,000 of inventory.
Suddenly the transaction requires considerably more money.
Understand early whether stock is included in the price or payable separately.
If it is additional, ask how the amount will be determined.
Is there an expected range?
Could seasonal inventory materially increase the figure?
Don’t wait until settlement week to discover the business acquisition needs another six figures.
Working Capital Is Different From Stock
Even after the stock has been paid for, the business still needs cash.
Wages need to be paid.
Suppliers need to be paid.
Rent falls due.
Fuel, utilities and other expenses continue.
Customers may owe the business money, but those receivables don’t necessarily put cash in the bank immediately.
This is working capital.
A business can be profitable and still run short of cash after an acquisition if the buyer uses every available dollar to complete the purchase.
How Much Cash Should Remain After Settlement?
There’s no single number that suits every business.
A café and a transport company have different cash cycles.
A professional services business may carry relatively little stock.
A wholesaler might need substantial inventory.
A construction business could have significant wages and supplier costs before progress claims are paid.
Work out how much the business normally needs to operate.
Then consider whether additional cash is required during the ownership transition.
The question isn’t simply:
“How much deposit can I contribute?”
It’s:
“How much can I contribute and still leave the business properly funded?”
Don’t Forget Your Own Income
If you’re leaving employment to buy the business, your personal cashflow changes too.
Perhaps you’ve been earning $150,000 a year as an employee.
After settlement, the business now needs to support you.
Can it?
Is your wage or drawing requirement already included in the profit figures you’ve been reviewing?
If you’re buying a business with a partner, what income do both of you expect?
The business doesn’t only need enough money to service acquisition debt.
It also needs to support its owners.
Can the Equipment Be Financed Separately?
Potentially.
If the acquisition includes eligible vehicles, machinery or equipment, there may be circumstances where asset finance can be considered for those identifiable assets rather than funding the entire acquisition through one facility.
For example, a transport business purchase might include trucks and trailers.
A manufacturing business could include substantial machinery.
A medical practice may include expensive clinical equipment.
Separating eligible assets can potentially form part of the broader funding structure.
The appropriate approach depends on the transaction, asset values and lender requirements.
What About the Goodwill Portion?
Goodwill and other non-tangible components may require business acquisition funding or another suitable commercial finance structure.
The lender may consider factors such as:
business financial performance
purchase price
buyer contribution
industry experience
management capability
existing debts
available security
transaction structure
Different lenders have different appetites for business acquisitions.
A transaction that doesn’t fit one lender’s approach may potentially fit another, but that doesn’t mean every business can be financed.
The underlying acquisition still needs to make commercial sense.
Does Industry Experience Matter?
It can.
Imagine an experienced dental practitioner buying an established dental practice.
Now compare that with somebody who has never worked in dentistry attempting to acquire the same practice.
The transaction isn’t identical.
Relevant industry, management or business experience can help a lender understand how the buyer intends to operate the business successfully after settlement.
If you’re changing industries, be prepared to explain the management plan.
Who has the technical expertise?
Which employees are staying?
What experience do you bring?
How will the business operate?
What If You’re Buying From Your Employer?
Management buyouts and employee purchases can have advantages.
You may already understand the customers, employees, systems and daily operation.
Perhaps you’ve effectively been running part of the business for years.
But familiarity shouldn’t replace due diligence.
You still need to understand what you’re paying for, the financial performance, legal structure, liabilities and future capital requirements.
Knowing the business well can be valuable.
It doesn’t mean you should buy it without independently assessing the transaction.
What If the Seller Is Leaving Money in the Deal?
Sometimes a seller may agree to receive part of the purchase price over time rather than receiving everything at settlement.
This is often referred to as vendor finance.
It can potentially form part of an acquisition structure.
But the terms matter.
How much is deferred?
When is it repaid?
Is interest charged?
What security or protections does the seller require?
How does it interact with the primary lender?
Vendor finance isn’t simply free additional deposit.
It is another financial obligation.
The lender and your legal advisers need to understand the proposed arrangement.
An Earn-Out Is Different Again
Some transactions include an earn-out, where part of the price depends on future business performance.
That can potentially help bridge disagreement between buyer and seller about what the business is worth.
But earn-outs can become complicated.
How is performance measured?
Who controls the business during the measurement period?
What happens if circumstances change?
Your solicitor and accountant should advise you about the structure and risks.
From a finance perspective, tell us if any part of the purchase price is contingent or deferred.
Are You Buying the Assets or the Company?
Business acquisitions can be structured in different ways.
You might purchase particular business assets.
In other circumstances, a buyer may acquire shares or interests in the entity that operates the business.
These can have materially different legal, tax and commercial consequences.
Your solicitor and accountant should advise you about the appropriate acquisition structure.
Don’t choose the structure simply because somebody says:
“This is how these deals are normally done.”
Understand what you’re acquiring and what obligations may come with it.
Due Diligence Isn’t Just Checking the Bank Statements
Before buying, you may need to investigate much more than revenue and profit.
Depending on the business, due diligence could involve:
financial statements
tax information
customer concentration
major contracts
supplier arrangements
employees
equipment
leases
licences
intellectual property
legal disputes
stock
debtor and creditor positions
required future capital expenditure
Your accountant, solicitor and other appropriate advisers should help determine what needs to be reviewed.
Finance approval doesn’t mean the business has been independently verified as a good investment.
What Capital Expenditure Is Coming?
A business can look profitable while carrying equipment that is about to require major replacement.
Imagine buying a manufacturing business and discovering six months later that a critical $300,000 machine needs replacing.
Or buying a transport company with trucks nearing the end of their useful economic life.
Ask what the business will need over the next several years.
The purchase price isn’t necessarily the final investment.
Future capital expenditure can materially affect the amount you’re really committing to the acquisition.
Don’t Make the Finance Fit an Overpriced Business
Finance availability shouldn’t determine what you’re willing to pay.
If a lender is prepared to finance a transaction, that doesn’t mean the business is worth the asking price.
Valuation and purchase-price decisions require appropriate commercial and professional advice.
The finance should support a transaction you’ve independently decided makes sense.
It shouldn’t become evidence that the price must be reasonable.
What Should You Send Us?
If you’re considering buying an established business, give Thrive Broking the broad transaction first.
Tell us:
business type
asking or agreed purchase price
what assets are included
whether stock is additional
approximate buyer contribution
your industry experience
whether property security may be available
expected settlement timing
whether vendor finance is proposed
how much working capital you expect to need
If financial information or a business sale memorandum is available, that may help us understand the transaction further.
The precise documentation required will depend on the lender and structure.
Business Acquisition Finance in Ballarat
Buying an established business around Ballarat can give you access to existing customers, revenue, employees, systems and equipment from day one.
But an established business also comes with history.
Understand what you’re buying.
Understand what cash is required at settlement.
Understand what cash the business needs afterwards.
Then look at how the acquisition can potentially be funded.
Found a Business You Want to Buy?
Send Thrive Broking the business sale information, asking price, approximate buyer contribution and details of your experience in the industry.
If stock is additional or substantial equipment is included, tell us that too.
We can investigate business acquisition and eligible asset finance options based on the complete transaction.
The objective isn’t to use every dollar you have to become the new owner. It’s to complete the acquisition with enough capital left for the business to keep operating after the seller hands you the keys.