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Using business finance to purchase an existing, established business is a popular alternative to starting a business from scratch. You’ll need to do exhaustive research into the business and everything that enables its current operation, but doing so will improve your chances of gaining approval for a loan and put you in the best position to continue operations and encourage growth into the future.
Shopping around for the right loan can save you thousands of dollars in interest and fees.
Building a business from the ground up is no easy task — one solution to this approach is to purchase an existing business. According to ASIC (Australian Securities & Investments Commission) 192,407 new businesses registered in Australia between January and October 2019. The number of businesses in Australia is increasing annually, as more Australians fulfil their dream of owning their own business. Here’s how you can do it.
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:
Your next step will depend on how you answered these questions. For example, purchasing an existing business without any personal industry experience of your own will require you to do much more pre-purchase planning and research than if you are buying out a competitor business.
Secured business loans are the most economical option for purchasing an existing business. To get the best rates on a secured business loan, you’ll apply through your bank — keep in mind that banks will have strict lending criteria, and applying for a business loan through a bank will be a lengthy process.
To apply for a secured business loan, you’ll need assets to use as collateral, such as your home. You’ll also need to provide full financial statements for the business you wish to purchase, your own personal business and strategic plans, and detailed information about the existing business, customers, and market it operates in.
Unsecured business loans have higher rates of interest than secured loans, but are usually easier and faster to get approval for, especially if you aren’t applying through your bank.
Specialist finance lenders offer speed, flexibility and access to finance that isn’t offered by traditional banks and their rigid approval criteria, which is why unsecured business loans are increasingly popular in Australia.
Equipment finance refers to specialist lender loans that are used to purchase vehicles, equipment and machinery for a business. However, if you are purchasing an existing business that already owns significant assets with a high value, it’s possible that you could borrow against these to acquire the finance you need for the purchase of the business.
There are conditions applied to equipment loans, and you’ll need to ensure that you understand any restrictions on your ability to sell or upgrade the equipment throughout the loan term set by the lender.
Once you’ve found an existing business you are interested in purchasing, the first thing you’ll need to do is ask questions. Ideally, the vendor will be selling the business because it is profitable and they want to cash out while their business is doing well. However, it’s difficult to find a perfect business without any faults, which is why you need to assess all aspects of its operations before moving toward making an offer.
Never be afraid to ask questions when you’re seriously considering purchasing an existing, established business. The answers to these questions could help you negotiate a lower purchase price, or help identify critical issues that may influence your decision to purchase the business at all.
Ideally, the owner will either be looking to retire or cash out to pursue other interests. This is an important question to ask as it could help identify issues with the business that may affect your future operations.
If the owner is selling because they need to clear debt, which kind of debt is it? Is it a debt taken out by the business, or personal debt? If the owner has taken on personal debt to fund the business, this could be a major red flag.
Similar to the reason for selling the business, is the owner looking to make a quick sale? There could very well be legitimate reasons for wanting to cash out — such as moving overseas, or a limited-time opportunity to start another business — but you’ll want to make sure this isn’t a tactic to rush a sale to avoid scrutiny of the business accounts.
On the plus side, if there is a legitimate reason for the rush to sell, you could leverage this to have the owner accept a lower price.
This is an important consideration if you’re purchasing the business to gain complete control and freedom in how you operate. In the case of a part sale, it’s more likely that the business owner wants to continue receiving some benefit from the business in the form of stable income, while relinquishing control of the daily operations.
Once you have a clear picture of the business and how it will continue to operate following your purchase, you’ll need to make a current assessment of the business by speaking with employees, customers, market experts, and by studying the financials and company business plan.
Employees will be the driving force behind business operations, but customers will be the people you depend on for revenue and profit.
Visit the business and speak to customers, ask them what they like and dislike about the business, or if there have been any changes in how the business operates recently. Is there loyalty to specific employees, the current owner, or how the business or brand operates?
Ideally, you’ll want to purchase an existing, established business in an industry you are familiar with. If you don’t understand the market that business currently operates in, then you’ll need to do extensive research to ensure you have no misconceptions once you take over.
Look at competitors, both locally and overseas, and see how the business compares.
This stage will need to be as exhaustive as the next — which is taking a detailed look at the business financials.
There are three key financial statements used by businesses:
Even if you have lengthy experience with examining financial documents, you will want to engage outside experts to provide comparative opinions. You may wish to speak to accountants, auditors, financial analysts, budget analysts, and forensic accountants to uncover any irregularities or concerns in the business’s finances.
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:
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.
You can apply for finance to purchase an existing business from a number of different lenders. Other methods to obtaining finance include engaging a finance broker, or using a Peer-to-Peer (P2P) Lending platform which will connect you with investors.
The main lenders who will consider approving finance for the purchase of an existing business include:
Each lender will have specific criteria for approval, and will be more or less suitable depending on your personal situation and how quickly you need access to funding. You can read our guide to learn more about how to compare business loans when looking to purchase an existing business.
Lenders will assess your application based on a number of different factors. Banks, for example, will require much more information than a P2P Lending intermediary, and the type and size of loan you apply for will also dictate your eligibility with certain lenders.
A good starting point is to collate the following information using the research and planning you’ve undertaken in assessing the suitability of an existing business for purchase, including:
Your business plan will be a crucial aspect of this process, both for you and the lender, and should clearly outline:
While this is a good start for your business plan, it’s important to remember that this process should be exhaustive; committing to owning a business — even an existing, profitable business — will be a demanding exercise.
The better you understand the position of the existing business both now and in the future, the more likely you are to be successful in gaining finance approval, and ensuring smooth operation once you’ve completed the purchase.
Buying an existing business can be a good way to acquire an established company and avoid set-up costs. You will have to do extensive research on the business first to ensure you are making a good financial decision, and there are risks involved in buying an existing business — such as not understanding the market it operates in.
There are benefits to buying an existing business over starting your own. You may be able to acquire a business that already has established processes and regular income streams. You could also benefit if the existing staff will stay on following the change of ownership.
To purchase an existing business you will have to find a business for sale and acquire the finance needed to pay the vendor (seller) the amount they wish to sell for. There are many other steps involved, but the first steps will involve assessing the financial health of the business and its suitability for purchase.
The cost to buy a business will vary depending on the amount wanted by the seller of the business. There are loan options available to help with financing your purchase and, depending on the assets included with the business, you may be able to offset some of this initial capital through various types of secured finance.
Yes, you can get a business loan to buy an existing business. You will need to first meet lender criteria for loan approval, and fully understand the amount you need to borrow to finance the purchase and continued operation of the business under your ownership.