A buyer in Armadale has found an established childcare business for sale.
The asking price is:
$780,000.
The business has been operating for:
11 years.
The sale information shows:
consistent revenue,
established enrolments,
employees,
and positive historical earnings.
The buyer has:
$250,000
available towards the acquisition.
She has also spent:
nine years
working in childcare operations and management.
Her accountant has reviewed the initial figures and agrees:
the business appears profitable.
So the buyer asks:
“If the business is making money, why wouldn’t a lender finance me to buy it?”
Because profitability is important.
But it isn’t the only thing being assessed.
A business can be:
profitable
and still present problems around:
purchase price,
cashflow,
buyer contribution,
management,
security,
lease,
financial trends,
working capital,
or the amount of debt required to complete the acquisition.
“Profitable” Is the Beginning of the Conversation
Not the end.
If someone says:
“The business makes $300,000 a year,”
we need to know:
what does $300,000 actually mean?
Revenue?
Net profit?
EBITDA?
Adjusted earnings?
Owner benefit?
Cashflow?
The seller’s interpretation of:
“makes”
may be very different from:
the number a lender or accountant is analysing.
Start With the Actual Financial Statements
A business-for-sale advertisement may contain:
a summary.
That’s useful for:
initial screening.
But when serious money is being borrowed, the underlying financial information becomes:
far more important.
Depending on the transaction, the buyer may need to obtain and review information such as:
financial statements,
tax returns,
BAS,
current trading figures,
and other business records.
The lender’s requirements will vary.
Historical Profit Doesn’t Guarantee Future Profit
Suppose the childcare business produced strong results over:
the last three years.
Good.
But what has happened:
this year?
If current revenue has fallen significantly, the historical average may not tell:
the full story.
Trends Matter
Imagine the business generated:
$2.1 million revenue
two years ago.
Then:
$2.0 million.
Current annualised trading appears closer to:
$1.7 million.
The business may still be:
profitable.
But the obvious question becomes:
Why is revenue declining?
There May Be a Perfectly Reasonable Explanation
Perhaps:
the seller reduced capacity,
there was a temporary staffing issue,
part of the premises was unavailable,
or another identifiable event affected trading.
Fine.
Document:
what happened.
Or the Decline May Be Commercial
Perhaps:
competition has increased,
enrolments have fallen,
operating costs have risen,
or the business is losing market share.
Those are different issues.
A buyer shouldn’t dismiss declining revenue simply because:
the business is still making money.
Profit Quality Matters
Suppose the seller advertises:
“Adjusted earnings: $310,000.”
The buyer needs to understand:
how that number was calculated.
Perhaps the accountant starts with:
reported profit
and adds back certain expenses.
Some adjustments may be:
reasonable.
Others may not continue under:
new ownership.
Consider the Owner’s Role
Suppose the current owner works:
full time
in the business.
The advertised adjusted earnings add back:
the owner’s salary.
But the new buyer doesn’t intend to perform:
the same role.
She’ll need to employ:
a manager.
If that manager costs:
$100,000 a year
plus employment costs,
the economics need to reflect:
that expense.
You Can’t Add Back a Cost and Then Pretend Nobody Has to Do the Work
This is a common commercial issue.
If the seller performs:
a genuine operational role,
someone may need to replace them.
The buyer should understand:
who
and
at what cost.
Now Add the Acquisition Debt
This is another major difference between:
the seller
and
the buyer.
The current owner may have:
no debt associated with purchasing the business.
The new owner may need:
hundreds of thousands of dollars
of acquisition finance.
Historical accounts may therefore show:
a profitable business
without the financing commitment the buyer will have after settlement.
Profit Before Acquisition Debt Isn’t the Same as Cash After Acquisition Debt
Suppose the business produces:
healthy earnings.
From those earnings, the new owner may need to fund:
normal operations,
tax,
capital expenditure,
working capital,
personal income,
and acquisition finance repayments.
The relevant question becomes:
How much capacity remains after everything is included?
The Purchase Price Can Still Be Too High
This is critical.
A good business can be:
a bad purchase
at the wrong price.
Suppose a business is profitable.
That doesn’t mean:
any asking price is justified.
If the seller wants:
$780,000,
the buyer and professional advisers need to understand:
what supports that figure.
How Much Is Goodwill?
The purchase may include:
equipment,
furniture,
systems,
customer relationships,
business name,
and goodwill.
If a substantial proportion of:
$780,000
is goodwill, that may affect:
the finance structure
and
the lender’s assessment.
Profitability Doesn’t Create Tangible Security
A business may generate excellent profit while having:
relatively few physical assets.
A professional-services business is an obvious example.
A buyer might be purchasing:
relationships,
reputation,
systems,
and recurring revenue.
Those can have commercial value.
But they aren’t the same as:
property
or
readily identifiable equipment.
The Buyer Still Matters
Our Armadale buyer has:
nine years
of childcare operations and management experience.
That’s useful.
Now imagine the same business is being purchased by someone with:
no childcare experience,
no management experience,
and no previous business ownership.
Same financials.
Different buyer.
A Lender Isn’t Only Buying the Seller’s History
The business will soon have:
a new owner.
The lender may want to understand:
why that person is capable of operating it.
That’s particularly important where:
the existing owner is central to the business.
What Happens When the Seller Leaves?
Ask:
who manages employees?
Who deals with customers?
Who handles suppliers?
Who understands the systems?
Who drives sales?
Who holds critical relationships?
Who solves operational problems?
If the answer to every question is:
“the seller,”
there may be:
transition risk.
The Buyer Needs a Credible Operating Plan
Perhaps the existing management team:
will remain.
Perhaps the buyer has:
relevant experience.
Perhaps the seller will provide:
a transition period.
Those things can help explain:
how the business will continue after settlement.
But don’t rely on:
vague assurances.
“The Staff Are Staying” Needs Investigation
Which staff?
What roles?
How long have they been there?
Are key employees aware of:
the sale?
Are there employees whose departure would materially affect:
the business?
The buyer needs to understand:
what they’re actually taking over.
The Lease Can Change Everything
For a premises-based business, the lease may be:
fundamental.
The buyer should obtain legal advice about:
the lease
and
the acquisition.
Questions may include:
remaining term,
options,
rent,
outgoings,
assignment,
and other conditions.
A Profitable Business With a Weak Lease Position Can Be a Problem
Suppose the business is:
highly location dependent.
But the lease has:
limited remaining tenure
and no certainty around:
future occupation.
That could materially affect:
the acquisition.
Historical profit doesn’t fix:
a poor property arrangement.
What if the Rent Is About to Increase?
The historical accounts show:
past rent.
The buyer needs to understand:
future rent.
If occupancy costs rise materially after:
settlement,
future profitability may be:
different from historical profitability.
The Same Applies to Wages
A business may have been profitable during a period when:
wage costs were lower.
If current staffing costs are:
materially higher,
the buyer needs to look at:
current performance.
Current Trading Can Matter More Than an Old Good Year
Suppose three years ago the business had:
an exceptional year.
That doesn’t necessarily mean:
the buyer should base the acquisition on it.
Recent trading can provide:
important context.
One Large Customer Can Distort the Picture
This applies to many businesses.
Imagine a commercial services business where:
45% of revenue
comes from one customer.
It may be:
profitable.
But losing that customer could:
transform the business.
Childcare Has Different Concentration Issues
Instead of one commercial customer, the buyer may need to understand:
enrolment patterns,
occupancy,
local demand,
staffing,
and other operational drivers.
The point is the same:
understand where revenue comes from
and
what could change.
Regulation Can Matter
Some businesses operate in:
highly regulated environments.
A buyer should obtain appropriate professional advice about:
licences,
approvals,
qualifications,
registrations,
and other requirements relevant to operating the business.
Finance approval doesn’t mean:
regulatory approval.
What About the Buyer’s Contribution?
Our buyer has:
$250,000.
Purchase price:
$780,000.
At first glance, someone might calculate:
$530,000
required.
But again:
that’s not necessarily the complete finance requirement.
The Buyer May Need to Retain Cash
Suppose she decides:
$70,000
needs to remain available for:
working capital,
transaction costs,
and an operating buffer.
Now only:
$180,000
may be available towards the purchase.
The apparent purchase funding gap becomes:
$600,000.
That’s materially different.
What if the Buyer Puts In All $250,000?
Then the purchase funding gap is smaller.
But what happens:
after settlement?
If the business needs:
cash,
the buyer may immediately need:
another facility.
A transaction shouldn’t be designed purely to:
reach settlement day.
The Business Has to Survive Day 2
And:
day 30.
And:
day 90.
That’s why working capital needs to be considered:
before the purchase.
Existing Buyer Debts Can Matter
The buyer may already have:
home loans,
vehicle finance,
personal debt,
or other business commitments.
Those obligations don’t disappear:
because the target business is profitable.
The buyer’s complete financial position may be relevant.
What if the Buyer Owns Another Business?
Now we need to understand:
that business too.
Is it:
profitable?
Will the buyer continue operating it?
Does it have:
debt?
Will it support or distract from:
the acquisition?
Again:
complete picture.
Security Can Affect the Available Options
A buyer may have:
property,
business assets,
or other potential security.
Another buyer may have:
no property.
That doesn’t automatically determine:
yes or no.
But it can affect:
which finance options may be available.
Don’t Assume Property Makes a Weak Deal Strong
A buyer says:
“I’ve got plenty of equity in my house, so the lender shouldn’t care about the business.”
That’s not a sensible assumption.
Security may be relevant.
But the buyer still needs:
a business capable of supporting the proposed debt.
Putting property behind:
a poor acquisition
doesn’t make the business:
better.
Don’t Use Security to Avoid Due Diligence
This is particularly important.
A buyer who owns valuable property may become:
less cautious
because finance appears possible.
That is backwards.
The more personal wealth potentially exposed to:
the transaction,
the more important it is to understand:
what you’re buying.
What if the Business Has Tax Debt?
That needs to be understood.
Likewise:
supplier arrears,
employee obligations,
leases,
finance commitments,
or other liabilities.
The buyer should obtain appropriate:
accounting and legal advice
about the transaction structure and what is being acquired.
Asset Purchase or Entity Purchase?
The structure of a business acquisition can have:
legal,
tax,
liability,
and finance implications.
That is a matter for:
appropriate professional advice.
Don’t choose the structure based solely on:
which one sounds easier to finance.
What if the Business Has Excellent Financials but the Buyer Has Almost No Contribution?
Still a problem to investigate.
The seller’s profitable history doesn’t automatically provide:
the buyer’s contribution.
What if the Buyer Has Plenty of Contribution but the Business Is Weak?
Same issue in reverse.
A large deposit doesn’t turn:
declining performance
into:
strong performance.
Acquisition Finance Is a Combination
Think about the transaction as several pieces:
The buyer
Experience.
Financial position.
Contribution.
Management capability.
The business
Historical performance.
Current trading.
Cashflow.
Assets.
Goodwill.
The purchase
Price.
Structure.
Lease.
Included assets.
Working capital.
The finance
Amount.
Security.
Repayment obligations.
Lender requirements.
A weakness in one area may affect:
the entire transaction.
Sometimes the Answer Should Be No
This matters.
The objective of business acquisition finance shouldn’t be:
get every business purchase approved.
Sometimes the numbers indicate:
the purchase doesn’t make sense.
Sometimes the buyer isn’t ready.
Sometimes the contribution is insufficient.
Sometimes the business is deteriorating.
Sometimes the price is too high.
Sometimes the operating plan is weak.
Finding that out before settlement can be:
valuable.
A Decline Isn’t Always the Worst Outcome
Imagine borrowing:
hundreds of thousands of dollars
to buy a business
that cannot support:
the debt.
Getting the finance isn’t:
the real objective.
Buying a viable business with:
an appropriate funding structure
is.
Don’t Start With “Which Lender Will Do It?”
Start with:
“Does this acquisition make commercial sense?”
Then:
“What does the buyer bring to the transaction?”
Then:
“What funding structure may be available?”
That order can save:
a lot of wasted effort.
What Should You Have Ready?
If you’ve found a business and want Thrive to investigate finance, useful starting information includes:
purchase price,
business-for-sale information,
available financial statements,
your contribution,
source of funds,
your experience,
whether you own property,
what is included in the sale,
and how much working capital you expect to need.
You don’t necessarily need:
every document
for the first conversation.
But we need enough information to understand:
the transaction.
Back to the Armadale Buyer
The business appears:
profitable.
That’s positive.
The buyer has:
relevant experience.
Also positive.
She has:
$250,000 available.
Again:
important.
But we still need to understand:
the quality of earnings,
current trading,
purchase price,
goodwill,
management structure,
lease,
working capital,
buyer commitments,
security,
and the amount of acquisition debt required.
Only then does:
“It’s profitable”
become part of a proper finance assessment.
Found a Profitable Business You Want to Buy?
Don’t assume:
profit equals approval.
And don’t assume:
a lender saying no
automatically means you need to find:
a more relaxed lender.
Sometimes the problem is:
the transaction.
Tell Thrive Broking:
what you’re buying,
purchase price,
your contribution,
your experience,
whether you own property,
what the business is earning,
and what financial information is available.
We can investigate potential business acquisition finance options based on:
the actual buyer
and
the actual business.
Because the question isn’t simply:
“Does this business make money?”
It’s:
“After the purchase price, new debt, working-capital needs, ownership change and future operating costs are considered, does this acquisition still make sense?”