The short answer
A loan to buy a business, often called business acquisition finance, funds the purchase of an existing business or franchise. The purchase price usually splits into goodwill, equipment and stock, and lenders treat each part differently. Equipment can be financed against the assets themselves, and stock is sometimes funded separately, but goodwill has little resale value, so lenders rely on the business's track record, your experience and any property security you can add. Without property, buyers commonly need a deposit of a third to a half of the goodwill. With property security, that can fall a long way, and a property-backed loan can sometimes fund the whole purchase. Lenders assess two to three years of the business's financials, how much depends on the current owner, the remaining lease term and your industry experience. Vendor finance, where the seller is paid part of the price over time, can close a gap. The government's business.gov.au guide covers due diligence.
How do lenders finance a business purchase?
A lender looks at what you're buying, piece by piece:
| Part of the price | How it's usually funded |
|---|---|
| Goodwill (the business's earning power and name) | Bank or non-bank business loan with your deposit, or a property-backed loan |
| Plant, vehicles and equipment | Equipment finance secured by the assets |
| Stock | Your deposit, the business loan, or a trade or stock facility |
| Working capital after settlement | A line of credit or overdraft |
| Property, if it's included | A commercial property loan |
How much deposit do you need?
Without property security, many lenders expect the buyer to contribute a third to a half of the goodwill. With a home or investment property as extra security, the cash deposit can be much smaller, and a second mortgage or private loan can fund the deposit itself. Some franchise systems have arrangements with lenders that can mean a lower contribution for approved brands, though the franchisee still has to qualify.
What do lenders assess?
- The business: two to three years of financial statements and tax returns, the add-backs used to show its true profit, customer concentration and how much it depends on the current owner.
- The premises: the remaining lease term and options. Lenders want the lease to outlast the loan.
- You: industry and management experience, your credit file and your own contribution.
- The deal: the price compared with earnings, the contract of sale and the handover period.
What role does vendor finance play?
With vendor finance, the seller accepts part of the price over time instead of at settlement. It shows the seller believes the business will keep performing, and it reduces how much you need to borrow. A lender financing the rest of the purchase will usually need to approve the vendor finance arrangement and rank ahead of it. An earn-out, where part of the price depends on future results, works in a similar way.
Can property fund the purchase?
Yes. Owners with equity in a home or investment property can use a property-backed loan for the deposit or, in some cases, the whole purchase. That can be quicker and simpler than goodwill lending, but it puts the property at risk if the business doesn't perform, so the repayment plan needs to be realistic.
What due diligence should you do first?
- Have an accountant review the financials, add-backs and tax position.
- Check the lease, its assignment to you and the landlord's consent.
- Confirm licences, permits and key supplier and customer contracts transfer.
- Search the PPSR for security interests over the business's assets.
- Work out staff entitlements you'll take on.
- For franchises, read the disclosure document and the franchise agreement, and get legal advice. The Franchising Code of Conduct sets out disclosure and cooling-off rights.
Example scenario
A buyer with ten years in hospitality agrees to buy a café for $280,000: $190,000 goodwill, $70,000 equipment and $20,000 stock. The seller agrees to $30,000 of vendor finance. The broker arranges a second mortgage over the buyer's investment property for the goodwill balance and stock, and equipment finance for a new coffee machine and refrigeration.
Example only. It isn't a real client.
