Buying an existing business can often yield a return higher than any other investment, whether property, shares or other alternative investments. This is especially so if you are a seasoned entrepreneur, an existing business owner making a ‘bolt on’ acquisition, or a corporate professional looking to apply your skills in small business. Let us help you with securing the finance for your next business acquisition.
Can I get a loan to buy a business?
Yes, it is possible to get a loan to buy a business, and there are two main options:
- Secured Business Loans: These loans require collateral, such as property or other assets, and typically offer lower interest rates
- Unsecured Business Loans: These loans don’t require collateral, but may come with higher interest rates and lower borrowing limits
Equipment Finance is available if you need to purchase or upgrade equipment for your business. Please see our page on Equipment Finance to learn more about this loan purpose.
How is a business acquisition loan assessed?
A business acquisition loan is assessed based on several key factors, including:
- Existing Cashflow: Lenders will examine the current cash flow of the business you intend to acquire. This involves reviewing the business’s historical financial statements and existing loan commitments to understand its revenue streams, operating expenses, and net income.
- New Cashflow: Lenders will also evaluate your projected financial statements and cash flow forecast (ideally 12 months or more) to understand how the acquisition will impact revenue, expenses, and revised loan repayments. This in turn supports an assessment of overall profitability, cash flow and amortisation of loans.
- Security: Depending on the loan type, you may need to provide tangible security such as commercial property, residential property and equipment. Intangible security may also be required, including personal guarantees and general security agreements over the companies generating the cash flows for loan servicing.
- Business Plan: A comprehensive business plan outlining the acquisition strategy, expected returns, and how you plan to manage the business post-acquisition is crucial.
- Management Resume / CV: Lenders will consider your prior industry experience and management track record of you and your team. At a minimum you should have your LinkedIn profile properly updated.
- Business Valuation: The valuation of the target business will also be assessed to ensure it aligns with the loan amount being requested.
- Strengths and Mitigants: Lenders will want to thoroughly understand both the strengths of your acquisition deal and the mitigants in place to address any potential risks.
Lenders may also require additional documentation, such as tax returns, business licenses, franchise agreements, lease agreements and other legal agreements related to the business being acquired.
Are certain types of businesses preferred over others?
Yes, certain types of businesses are often preferred over others when it comes to acquisition loans. Lenders typically look for businesses that demonstrate stability, growth potential, and tangible assets. Some preferred characteristics include:
By Industry:
- Medical: Healthcare businesses such as general practices, specialised clinics, pharmacies, optometrists and dental clinics, are often favoured due to their essential nature and the steady demand behind these services
- Professional Services: Businesses which require tertiary qualifications and additional training to practise are preferred because they typically have established client bases and consistent revenue streams. This includes law, accounting practices, as well as businesses in engineering services and the built environment e.g. architects
- IT Practices: Managed Services Providers are also sought after by banks as clients due to the recurring nature of the income that they receive, and because IT is currently a growth sector
- Childcare and Aged Care: These sectors adjacent to the medical industry, also have stable demand with some Government support for users and participants as a source of income
Other Industries:
- Growing & Resilient Businesses: Lenders like businesses that show a steady growth trajectory and resilience in the face of economic fluctuations.
- Property / Tangible Security: Businesses with tangible assets, such as property and equipment offer lenders more reliable security in case of default.
- Businesses with Asset / Goodwill Value: Businesses that regularly trade in the marketplace at known multiples are also attractive to lenders
Other industries can include anything from manufacturing, importing / exporting, hospitality, retail, travel and automotive.
What supporting documents are needed?
When applying for a business acquisition loan, important documents will include:
- Identification Documents
- Company Financial Statements and Tax Returns – for your existing business (where applicable), and the business you are buying. Presenting three years trading history is ideal – the more trading history presented, the better
- Personal Tax Returns and Notices of Assessment – this is to show you can continue to meet your own personal commitments after the acquisition
- Cashflow Projections – What incremental earnings to you expect to make, and can you manage the new loan
- Business Plan – A detailed business plan outlining your onboarding / integration strategy, expected returns, and how you plan to manage the business post-acquisition
- Purchase Contract: A copy of the fully executed purchase contract for the business acquisition.
- Other Legal Agreements: Any relevant legal agreements related to the acquisition such as franchise agreement, lease agreement and key customer contracts
- Evidence of funds to complete the purchase
What if my bank doesn’t want to support an acquisition loan? What are my other options?
If your usual bank doesn’t want to support your acquisition, it is worth engaging an experienced Finance Broker to seek out alternative lending options. For example, other banks may have more risk appetite, experience dealing with the desired industry type or simply more capacity.
If banks don’t want to look at the deal in general, you may wish to consider non-bank lenders like Banjo, Dynamoney and Shift, as well as a range of other private creditor providers.
Does it help if it’s a franchise?
Yes, franchises are often seen as lower-risk investments because they come with an established business model, brand recognition, and support from the franchisor. This can make it easier to secure financing from lenders who may view franchises as more stable and predictable compared to independent businesses.
You can read more on our page about franchise lending.
Do I need to contribute a deposit? If yes, how much?
You will need to contribute a deposit where:
- The loan is unsecured (non-property backed)
- The lender applies a maximum Loan-to-Value ratio or EBITDA multiple on that business or asset type
- Your serviceability does not cover the full purchase price
In any of these cases, you will need to make an equity contribution to make up the full purchase price of the business you are buying.
You may not need to contribute a deposit where:
- You are providing property security
- You are generating surplus cash flow from your existing businesses OR your existing job, and intend to remain employed in that job (yes, this is possible with some businesses!)
- Your serviceability allows you to cover 100% of the purchase price
So putting ‘nothing down’ yourself may be possible for bolt on acquisitions for established businesses owners, or clients that can leverage existing property assets to buy a business.
What are the loan terms likely to be?
The loan terms for a business acquisition loan can vary depending on the lender, the type of business and the remaining lease term. Key terms to look out for include:
- Interest Rate – note unsecured rates will typically be higher, than property backed loans
- Loan Amount & LVR – determined by your serviceability, acquisition price and the lender’s policy
- Repayment Terms – Loan terms tend to be shorter for acquisition loans, with Principal & Interest repayments, amortising the loan to $0
- Fees – Certain fees may apply such as establishment fees, legal fees and early repayment fees
- General Security Agreements – this will be placed over any business where the cash flow is reliant for serviceability
- Personal Guarantees / Directors Guarantees – these will be required in virtually all small business loans
- Business Banking – some banks will only provide the loan conditional on the acquired business (and possibly your existing business) banking with the lending institution