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Blog   »   February 2016   »   Buying A Business - Part 2

Buying A Business - Part 2

Buying A Business – Part 2

Before we start the loan process we need to know:

  • The purchase price of the business
  • The breakup of the purchase price
  • What cash do you have
  • What equity do you have in your home
  • What financials has the vendor / agent supplied
  • Is Vendor Finance available
  • You solicitor and accountant’s name and phone numbers

The Purchase Price

Simple, what amount does the vendor want to pass title / possession over to you.

The Break Up

This usually can be broken down into 4 major areas:

  • Goodwill – this is the amount the vendor believes the business is worth to you, the purchaser, for getting the opportunity to earn a living / profit from this venture
  • Equipment – cars, trucks, computers, loaders, cranes, lathes etc and other items that are relevant to the business operation. What value does the vendor put on these goods? This equipment could potentially be used as security for the loan depending on what it is and how new/old it is (Eg. A 2 year old car, truck or van can be used as security whereas a 14 year old car, truck, van, computer, fridge etc will not. Some aged items would still be acceptable, for example a 14 year old overhead crane could still be used as security for the loan).
  • Stock – if applicable, has a value to you and the vendor however lenders generally will not give any value to stock (some exceptions) as this is the first thing that diminishes if problems start to occur.
  • Real Estate – Is there real estate being purchased with the business? For example an industrial shed being purchased as part of the business. Some lenders could use this commercial real estate as security, generally up to 70% of its value (Note: some lenders don’t do commercial loans – we know who does and who doesn’t).

What cash do you have?

How much cash do you have to put into the purchase, making sure you take into account the cost of:

  • Stamp duty
  • Legals
  • Working capital (depending on the business you are going into, this can vary greatly)

Example: With an instant cash flow business such as a coffee shop, you may only need to cover a maximum of one month’s costs – eg. wages, stock purchase etc. A business that contracts to say the mining industry or some large contractors may only get paid on 90 day terms so you will need to cover at least 120 days expenses.

Remember, not all suppliers will give instant credit to the new owner and may ask for cash on delivery for stock purchases.

What equity do you have in your home / real estate?

As a general “Rule of Thumb” lenders will accept up to 80% of a Residential property’s value as equity.

For example: if your home is worth $700,000.00 and you have a mortgage of $200,000.00 then you have equity of $500,000.00. The bank however will only consider 80% of the property’s value so they would calculate your equity as $360,000 (eg. 80% x $700,000 - $200,000 = $360,000)

Not all lenders lend for business purchases. In particular Building Societies and Credit Unions are good with consumer PAYG customers but often prefer not to get involved in business acquisitions, and if they do they look at things totally differently to banks.

What Financials Does the Vendor Have?

Most lenders will require the most recent tax return (and so should you) with accompanying profit and loss statement.

Some vendors will have you believe there is a lot of “cash” that goes through the business.

REMEMBER!!!!

  1. If cash sales exist they should be shown in the tax returns
  2. If they aren’t, that is an offense and you cannot account for something that may or may not exist
  3. If the vendor has taken a portion of cash (without tax) they should be happy with that, but no lender will accept that proportion nor will your accountant and nor will we at Hunter Business Finance.

All lenders treat figures shown in the profit and loss differently, and that is where we at Hunter Business Finance come in. We know who accepts what and why. For example, some lenders accept equipment depreciation as a non cash item and believe it can be used to help show the ability to service your debt. Other lenders believe it is an expense and do not make any allowance.

Is Vendor Finance Available?

Some vendors will allow the purchaser to pay a portion of the purchase price back to them as a loan. This can be good for both parties, but you should clarify what payments arrangement the vendor wants and what security they require as this may conflict with what your lender requires.

Solicitors, Accountants & Finance Brokers

Having good professionals on your side is of considerable benefit as it is their job to protect you and ensure you get clear title to build the business, and any and all equipment in that business.

Similarly, using a finance broker such as Hunter Business Finance will give you a greater chance of finance approval to get you started, and the opportunity to achieve what you want. Give us a call today on (02) 4978 8600.

Posted: 8/02/2016 2:09:30 PM by Hunter Business Finance | with 7 comments

Comments

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