If you’re considering purchasing an existing business, whether it’s buying into a business or buying the entire business, there are several business finance options that can assist you. But first, you need to know what to look for in a business to ensure it’s suited to you.
6 Questions to ask when buying a business
Buying an existing business can be easier then starting a business from scratch. It takes away the pain and risk of getting the business off the ground. Once you have decided what type of business you’re interested in, you will need to do some due diligence and check its financial health before committing to buying the business.
6 questions to ask when buying a business are listed below.
Please note that this is only a concise list of questions. There will be many variables involved that will influence the type of information you will need to know.
1. Why is the owner selling the business?
When buying a business this seems like an obvious question, but it’s important you speak to the owner to get a better understanding on why they are selling the business, you may even wish to speak to customers and suppliers for more information.
2. What are the financial records of the business?
Get a record of all financial statements (cash flow, profit & loss, balance sheet) and tax records (tax returns, BAS, PAYG, stamp duty) and work with your accountant to thoroughly review these details.
3. Who are the existing customers and suppliers?
Ask for a list of all existing customers and suppliers to check the business pipeline and to see if any major contracts are expiring.
4. What inventory and other assets does the business own? Are these included in the sale of the business?
Cross check the inventory list with what currently exists in the business. Ensure these assets are insured and if they are financed you will require a copy of the finance documents.
5. What legal documents does the business have?
Including licenses, permits, contracts, leases, agreements, and so on. Work with your lawyer to ensure you understand and are across these documents.
6. What financing options are available?
Speak to your Finance Broker in the early stages of the business buying process to get an understanding of what type of finance options will be available for you and your financial situation.
Finance options for buying a business
When it comes to finance for your business purchase, there are several different options available, with the most suitable option depending on your individual circumstances. You can finance a business purchase using debt finance (secured business loan, equipment finance, etc.) or a combination of equity/debt finance
Debt finance is money borrowed from financial institutions (banks/lenders) that will be repaid within an agreed upon time frame. The most common types of debt finance to buy a business include:
Secured business loan
A secured business loan is a low-cost debt finance option, where the borrower is required to use commercial or residential real estate as security.
If the business you are purchasing owns high value assets, there may be an option to secure a loan on the existing machinery and equipment. This finance option can be a great alternative to providing your own personal security, such as your home. However, if you are planning on upgrading or selling any of the equipment, you will need to have a clear strategy when structuring the equipment finance.
Choosing the right finance option to buy your business is so important as it will impact you for many years to come. If in doubt of what finance option suits your situation, contact our offices on (08) 6318 2777 or email firstname.lastname@example.org and we will be more than happy to assist.
What you will need to apply for debt finance
When approaching a lender for debt finance they will require information about you and the business itself. The information requested varies depending on the lender, but they will generally require the following:
- Your current financial situation and how you will repay the loan
- What assets will be used as security
- The structure of the business you are purchasing
- Details of the location/s
- How long the business has been operating
- The industry the business operates in and the key competitors
- The historical financial as well as the financial forecast for the business (using the 3-way forecast model – this looks at the cash flow statement, balance sheet and profit & loss)
- The total value of all assets and other inventory the business owns
- If the business has any existing debts or loans
- A detailed business plan
Understanding what information is required when approaching a lender is so important. It allows for a smooth and seamless process from application to approval.
At Ledge, we partner with existing and future business owners to source a suitable debt finance product, or a combination of finance products, to secure their business purchase.
Given the complexity of how businesses can be purchased and the various finance options that can be used, this article does not cover every option. However, if you do have any questions on the above please don’t hesitate to contact our offices here and we will be more than happy to assist.