A hospitality manager in Glenelg has found an established café and food business for sale.
She’s worked in hospitality for:
14 years.
For the last six years, she’s managed:
staff,
rosters,
suppliers,
stock,
budgets,
and day-to-day operations
for other hospitality businesses.
Now she wants to own one herself.
The asking price is:
$420,000.
The business has:
existing customers,
employees,
commercial kitchen equipment,
a lease,
and several years of trading history.
The buyer has:
$140,000
available towards the acquisition.
Her first question is:
“Can I borrow the rest?”
Possibly.
But business acquisition finance usually involves much more than:
purchase price minus deposit equals loan.
Before looking at potential finance options, we need to understand:
the buyer,
the business being purchased,
what is included in the sale,
how much money the buyer is contributing,
and whether enough cash will remain to operate the business after settlement.
Financing a Business Is Different From Financing a Car
If someone buys a:
$60,000 vehicle,
there is an identifiable asset with:
a make,
model,
year,
and market value.
A business purchase can be much more complicated.
The $420,000 purchase price might include:
equipment,
stock,
goodwill,
customer relationships,
business name,
systems,
and other business assets or rights.
Not every component necessarily provides the same security value to a lender.
That’s why:
“The business costs $420,000”
doesn’t tell us enough.
Start With the Buyer
Before becoming fascinated by the business being sold, look at:
who is buying it.
For the Glenelg buyer, relevant information includes:
14 years in hospitality,
six years in management,
experience with employees,
experience managing stock and suppliers,
and familiarity with the type of operation being purchased.
That’s useful context.
She isn’t moving from:
an unrelated occupation
into:
an industry she has never worked in.
Experience Can Matter
Imagine two people want to buy the same café.
Buyer One
Has worked in hospitality for:
14 years.
Has managed:
busy hospitality venues.
Understands:
wages,
food costs,
rosters,
suppliers,
customer service,
and daily operations.
Has:
$140,000
available towards the transaction.
Buyer Two
Has never worked in hospitality.
Has never owned or managed a business.
Has:
$20,000
available.
Says:
“I’ve always wanted to own a café.”
Same business.
Same asking price.
Very different buyer profiles.
Does That Mean an Inexperienced Buyer Can Never Get Finance?
No.
But experience, contribution, security, financial position and the strength of the proposed acquisition can all affect the transaction.
A buyer shouldn’t assume:
“The business makes money, therefore the lender will finance me to buy it.”
The lender is assessing more than:
the seller’s historical profit.
How Much Money Is the Buyer Contributing?
In this example:
purchase price:
$420,000.
Buyer contribution:
$140,000.
At first glance, the funding gap appears to be:
$280,000.
But that isn’t necessarily the final finance requirement.
There are other costs and cash needs to consider.
Don’t Put Every Dollar Into the Purchase Price
Suppose the buyer has:
$140,000
in total savings.
She contributes:
all $140,000
at settlement.
What does she have left the following morning?
Potentially:
very little.
But the business may immediately need money for:
wages,
suppliers,
utilities,
insurance,
rent,
stock,
repairs,
and other operating expenses.
Buying the business is only:
day one.
The buyer still has to run it.
Working Capital Matters
This is one of the most important parts of a business acquisition.
A buyer may focus so heavily on:
“How do I fund the purchase?”
that they forget:
“How do I fund the business after I own it?”
Suppose the buyer determines she wants at least:
$45,000
available as working capital after settlement.
Now the funding strategy needs to take that into account.
The Purchase Price Isn’t Necessarily the Complete Cost
There may also be:
legal costs,
accounting costs,
due diligence costs,
licensing or transfer expenses,
and other transaction costs.
The buyer should obtain professional advice about:
the acquisition structure
and
associated costs.
Finance is only one part of buying a business.
What Exactly Is Being Purchased?
The broker needs to understand:
what the $420,000 represents.
Perhaps the sale includes:
commercial kitchen equipment,
furniture,
fixtures,
business name,
customer base,
systems,
and goodwill.
Stock may be:
included
or
adjusted separately at settlement.
The lease may need:
assignment
or
a new arrangement.
The details matter.
Goodwill Can Be a Major Part of the Price
Suppose the identifiable equipment and other tangible business assets have a value significantly below:
$420,000.
The remaining value may largely represent:
goodwill.
Goodwill can reflect things such as:
established trading history,
customer relationships,
location,
brand,
reputation,
systems,
and earning capacity.
But goodwill isn’t the same as:
a truck,
property,
or machine
that can be readily identified and sold.
That can affect how an acquisition is financed.
Don’t Assume the Seller’s Asking Price Is the Business’s Value
A business can be advertised for:
$420,000.
That doesn’t automatically mean:
it is worth $420,000
or
a lender will accept that valuation.
The buyer still needs to investigate:
the business financials,
profitability,
assets,
liabilities,
lease,
customer base,
and other commercial considerations.
This Is Where the Accountant Becomes Important
A broker can help investigate:
finance.
But a broker shouldn’t replace:
financial due diligence.
The buyer’s accountant may help assess:
financial statements,
tax information,
business performance,
adjustments,
working capital,
and whether the purchase price makes commercial sense.
And the Solicitor Has a Different Role
The solicitor may advise on matters such as:
sale contract,
business structure,
lease,
conditions,
legal obligations,
and transaction documentation.
Again:
finance is one part of the acquisition.
What Will a Lender Want to Understand About the Business?
Depending on the lender and transaction, information may include:
historical financial statements,
tax returns,
BAS,
business bank information,
asset details,
lease information,
purchase contract,
and other financial or commercial information.
Requirements vary.
Historical Profit Matters, but Don’t Stop There
The seller says:
“The business makes $180,000 a year.”
What does that mean?
Revenue?
Net profit?
Adjusted profit?
Owner earnings?
EBITDA?
Something else?
Don’t use:
“makes”
as a financial measure.
Get the actual accounts.
Seller Adjustments Need to Be Understood
Business-sale advertisements sometimes present:
adjusted earnings.
These may add back expenses the seller argues won’t continue under new ownership.
Some adjustments may be reasonable.
Others may require closer examination.
The buyer and accountant need to understand:
how the advertised earnings were calculated.
The Buyer Will Run the Business Differently
Perhaps the current owner works:
60 hours a week
and doesn’t employ:
a full-time manager.
The new buyer intends to work:
30 hours
and employ a manager.
That could change:
the cost structure.
Historical performance needs to be considered in the context of:
how the buyer intends to operate the business.
What if the Buyer Will Work in the Business Full Time?
For the Glenelg buyer:
yes.
She intends to become:
an owner-operator.
Her existing hospitality management experience becomes relevant to:
how she plans to run the business.
What if the Buyer Wants It as a Passive Investment?
That’s different.
If the business currently relies heavily on:
the owner
and the buyer doesn’t intend to work in it, the business may need:
additional management.
That can affect:
profitability
and
cashflow.
What if the Buyer Doesn’t Own Property?
This is a common question.
Not owning property doesn’t automatically mean:
business acquisition finance is impossible.
But it can materially affect:
available options,
particularly where a large part of the purchase price is goodwill rather than identifiable assets.
The answer depends on:
the buyer,
contribution,
business,
transaction,
security available,
amount,
and lender requirements.
We’ll deal with that question separately in this journey.
Don’t Hide the Fact That You Don’t Own Property
Tell the broker at the beginning.
Likewise, if you:
do own property,
say so.
That doesn’t automatically mean:
the property must be used as security.
But the broker needs to understand:
the actual position.
How Much Contribution Does the Buyer Need?
There isn’t one universal percentage that applies to:
every business acquisition.
The required contribution can depend on:
the transaction,
buyer,
business,
security,
purchase structure,
lender,
and amount.
That’s why:
“What’s the minimum deposit for buying a business?”
doesn’t have one answer.
The Buyer Should Have Genuine Money in the Transaction
In our Glenelg example, the buyer has:
$140,000.
But where did it come from?
Savings?
Sale of another asset?
Equity?
Gift?
Another loan?
The source of the contribution may matter.
Borrowing the Deposit Is Still Borrowing
Suppose the buyer says:
“I’ve got a $140,000 deposit.”
Then we discover:
$120,000
of it comes from another new loan.
That changes the financial position.
The buyer hasn’t suddenly created:
$140,000 of equity.
They’ve created:
another debt.
Existing Personal and Business Commitments Matter
The buyer may already have:
home loan repayments,
car finance,
credit cards,
personal loans,
or other commitments.
Those don’t disappear when:
the business settles.
The complete financial position matters.
What if the Buyer Is Leaving a Salary?
This is another important consideration.
The Glenelg buyer currently earns:
a salary
as a hospitality manager.
After settlement, she intends to leave employment and work:
in the acquired business.
The business now needs to support:
its operating costs,
finance commitments,
and potentially the buyer’s personal income requirements.
Don’t Forget Your Own Living Costs
A business acquisition might look affordable until:
the buyer’s personal needs
are included.
The owner still needs:
somewhere to live,
food,
utilities,
transport,
and money for personal commitments.
The business has to support:
the real world.
What if the Business Has Equipment?
That may potentially create different finance considerations.
Suppose part of the acquisition includes:
commercial kitchen equipment
with identifiable value.
Depending on the transaction, equipment finance may potentially be relevant to certain eligible assets.
But don’t assume the entire purchase price can simply be:
split into an equipment loan
because equipment happens to be inside the business.
The structure needs to reflect:
the actual transaction.
What if Property Is Included?
Now we’re dealing with:
another category again.
Buying:
a business
and
the commercial property it operates from
can involve different finance considerations from buying:
the business only.
Tell the broker exactly what is included.
What if the Seller Offers Vendor Finance?
Vendor finance may sometimes form part of a business-sale transaction.
For example, the seller may agree to receive:
part of the purchase price
over time.
That doesn’t automatically mean:
a lender will accept the proposed structure.
The terms need to be disclosed and assessed.
Don’t Create Side Agreements Without Telling the Lender
If the purchase involves:
vendor finance,
deferred payments,
related parties,
or other arrangements,
tell the broker.
The finance application needs to reflect:
the real transaction.
What if the Business Has Tax Debt or Other Liabilities?
This is where the purchase structure and due diligence become important.
A buyer needs professional legal and accounting advice about:
what exactly is being acquired
and
what obligations may come with the transaction.
Don’t assume:
“I’m only buying the business, so none of that matters.”
Get advice.
What if Revenue Has Fallen Recently?
Don’t focus only on:
three-year averages.
Suppose revenue was:
strong two years ago,
slightly lower last year,
and significantly lower this year.
Why?
Perhaps:
the owner has reduced hours,
a major customer left,
the area changed,
competition increased,
or the business is genuinely declining.
The trend matters.
What if Revenue Has Increased?
Good.
Understand why.
Was the increase driven by:
repeat customers,
higher prices,
additional trading hours,
a temporary event,
one large customer,
or genuine sustainable growth?
Again:
the numbers need context.
Customer Concentration Can Matter
Imagine:
45% of revenue
comes from one corporate catering customer.
What happens if:
that customer leaves after settlement?
A buyer should understand:
where revenue comes from.
Supplier Relationships Matter Too
Does the business rely on:
one critical supplier?
Are supplier terms expected to continue?
Will ownership change affect:
pricing
or
credit terms?
These questions can affect:
working capital.
The Lease Can Be Critical
For a hospitality business in Glenelg, location may be a major part of:
the business’s value.
So the buyer needs to understand:
remaining lease term,
options,
rent,
outgoings,
and whether the lease can be transferred or replaced.
A profitable business with:
an unsuitable lease position
can become a very different acquisition.
Legal advice is important here.
What if the Business Is a Franchise?
Then there may be:
franchise agreements,
fees,
approval processes,
training,
and other requirements.
Franchise finance can have its own considerations.
Again:
tell the broker what you’re actually buying.
A Strong Business Doesn’t Automatically Mean a Strong Acquisition
This distinction matters.
A business may be:
profitable.
But the buyer might:
lack sufficient contribution,
have limited relevant experience,
or need to borrow too much relative to the transaction.
Alternatively, a strong buyer may find:
the target business itself isn’t financially strong enough.
The lender is looking at:
both sides.
This Is Why Business Acquisition Finance Can Take Work
There can be a lot to understand:
buyer experience,
contribution,
business financials,
purchase price,
goodwill,
assets,
lease,
working capital,
security,
existing debt,
and transaction structure.
That’s why it helps to assess the broad finance position:
before getting too far into the purchase.
Don’t Sign an Unconditional Contract Assuming Finance Will Be Available
If finance is required:
obtain legal advice about the purchase contract and appropriate conditions before committing.
A broker cannot undo:
a contract
you shouldn’t have signed.
When Should You Speak to a Broker?
Ideally:
once you’ve identified the type and approximate value of business you’re considering
and
before making irreversible commitments.
If you’ve already found the business:
send the information through.
What Should You Send First?
Start with:
business sale information,
asking or agreed purchase price,
your available contribution,
your industry and management experience,
whether you own property,
and any financial information already available for the business.
If there’s a:
sale memorandum
or
business financial information,
that can help.
You Don’t Need Every Document Before the First Conversation
The first step is determining:
whether the transaction appears worth investigating further.
If the buyer says:
“The business is $420,000, I have $20,000, no property, no industry experience and no financial information for the business,”
that’s important to know:
immediately.
Likewise:
“The business is $420,000, I have $140,000, 14 years in the industry and three years of business financials are available”
gives us a very different starting point.
Back to the Glenelg Buyer
She wants to purchase:
an established hospitality business.
Purchase price:
$420,000.
Available contribution:
$140,000.
Industry experience:
14 years.
Management experience:
six years.
The business has:
existing trading history,
employees,
equipment,
customers,
and financial information available for review.
That doesn’t mean:
finance is guaranteed.
But it gives us:
a genuine acquisition transaction
that can be investigated.
The next step is understanding:
the business financials,
purchase structure,
working-capital requirement,
buyer position,
and potential finance options.
Thinking About Buying a Business?
Before focusing only on:
“How much can I borrow?”
tell Thrive Broking:
what business you’re considering,
purchase price,
how much you can contribute,
your relevant industry or management experience,
whether you own property,
what is included in the purchase,
and what financial information is available for the business.
We can investigate potential business acquisition finance options based on:
the actual buyer
and
the actual business.
And if the transaction doesn’t appear financeable in its current form:
it’s better to identify that early.
Because finding a business you want to buy is exciting.
But the finance needs to work:
before the business becomes yours.