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Buy a Business

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Buy a Business

If you are looking to buy a business there are a number of finance options available that should be considered. Most banks and lenders in Australia offer a variety of loans including secured and unsecured loans. These tend to require a minimum of 12 months trading of the business and good cashflow. As with most business sales, the securing of a loan can be time consuming but is necessary if you don’t have finance available to buy the business.

How does a loan to buy a business work?

Running your own small business is an appealing idea if you have the ingenuity and know-how to make it work, but it takes a lot of money to purchase a business.

Getting a loan to buy a small business is not as simple as getting a business loan for a company that you’re already running. There are three main factors to consider before you even start to look for a lender. If you don’t have an answer to each of these three points, it’s unlikely a lender will consider offering you money.

Determine how much money you’ll need

Borrowing too much means you’re paying more in interest than you need to, while borrowing too little means you won’t have enough for everything you need and may need to apply for a second loan. Make sure your estimation is as accurate as possible.

Have a solid business plan

It’s not enough to simply own a small business, you need to manage it too. Your plan should clearly show how the business will manage expenditures and income to achieve profitability and how long this will take.

Consider your repayment timeline

How long will it take you to pay back the loan? How much will you be able to afford to repay per month? Will it be a consistent amount or can you pay back more as the business grows?

Who can buy an existing business?

The simple answer to who can buy an existing business is: anyone. The better question is: how does someone buy an existing business? The answer to this will depend on a number of factors, including:

01

The type of purchase you wish to make – are you buying out a competitor, or buying a company to expand your current business operations?

02

Your business and industry experience – are you new to business or do you have experience in the industry you with to buy in to?

03

How you plan to finance your purchase – will you look to friends and family, investors and crowd-funding to obtain finance, or will you borrow money from a bank or alternative lender?

04

Your personal borrower profile if applying for a loan – Do you own a home or commercial property that you can use as collateral or are you planning to finance a business without any money or security to use on a loan?

What do I need to get approved for a loan to buy a business?

The main obstacle between you and financing is your ability to convince a lender you can buy a small business and make it profitable.

Gather evidence

Consider how profitable it will be in concrete dollar values and draw on as much evidence as possible. Your lender will make a yes or no decision based largely on how much you can convince it the business will be profitable. You must have formal financial projections.

Highlight your experience

Having relevant small business management and financial experience will inspire more confidence in potential lenders. Don’t hesitate to mention how your own business history can help you succeed.

Set a budget

Break down what exactly you plan to spend the money on and set a budget. This is not only necessary for your own planning, but it’s also essential information all lenders need to know. If the money will go towards staff or refurbishment costs, for example, they might expect a slower return on investment. If it’s going towards inventory and marketing then they might expect a quicker return.

Pros and cons of buying an existing business

Buying an existing business is no small task – it will require dedication and commitment in both the research and running of the business to ensure you make a profit. The main hurdles when deciding to purchase a business – as opposed to a franchise – will be a large up-front purchase amount, and a vital need to understand the business and how it operates at the most granular level.

You’ll need to have a crystal-clear picture of:

How much money you’ll need to maintain consistent operation of the business
  • Current business profits, and how this may affect your cash flow over time
  • How the business is expected to perform in the short, medium, and long-term
  • The industry the business operates in, and the ability to anticipate any changes that may affect the business in the future
However, owning a business is the ultimate working freedom; if you understand the market you operate in and have a solid work ethic, you can run your business exactly the way you choose to and – hopefully – make a consistent profit.

Pros

  • Own your own business
  • Don’t need to set up a business from scratch
  • Start operating immediately
  • Establish customer base
  • Existing systems, facilities, equipment
  • Clear budget in setting up
  • No delay on business operations

Cons

  • More expensive up-front amount to purchase
  • Need to understand profit and loss for business
  • Need to extensively research the business (can be difficult for first-timers)
  • Need to ask a lot of questions and be sure you understand why the business works
  • Need to understand if current ownership is the driving force behind profit – i.e. owner-supplier relationships, customer relationships