Finance Guide for Buying an Existing Established Business
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.
In this Finance Guide for Buying an Existing Business you’ll learn:
- The pros and cons of buying an existing business
- The options available based on your individual finance profile
- The questions you need to ask the current owner
- Financing an existing business with no money
- Where to get a business loan for purchasing an existing business
- How to apply for a loan with banks and non-bank lenders
Pros and cons of buying an existing business
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.
Buying an Existing Business Pros and Cons
Buying an existing business will allow you to start operating immediately, but will require you to extensively research the business and its position in the market first
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:
- The type of purchase you wish to make - are you buying out a competitor, or buying a company to expand your current business operations?
- Your business and industry experience - are you new to business or do you have experience in the industry you with to buy in to?
- 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?
- 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?
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.
Using your home or commercial property you own as collateral on a business loan will often result in a lower rate
Buying an existing business questions to ask
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.
Important considerations and questions to ask
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.
- Why is the vendor selling the business?
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.
- Is there a rush to sell the business, and why?
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.
- Is the business being sold in full or in part?
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.
There still may be some conditions put in place that prevent you from making any major changes to how the business runs, but a part sale will also often provide a lower purchase price, and you’ll also benefit from having the previous owner at your disposal to ask for advice if needed.
- Are all assets included?
Assets can be the key to ensuring the business runs smoothly from day one. It’s also vital to understand whether all assets will be included or not, as this will greatly affect the amount of finance you will need to purchase and maintain operations. Two good examples are IT equipment and delivery vehicles.
If you purchase a retail business that heavily relies on computer equipment and electronic sales machines, there will be considerable effort in setting up your own database and training existing staff on these new machines.
Likewise, if your purchase is a business which predominantly uses courier vehicles or food-delivery vehicles to create revenue, you’ll need to factor in finance to account for these - for example, using a chattel mortgage to finance business vehicles.
- Will employees be staying?
Experienced employees will be the driving force behind maintain business operations following the sale of the business. While this may not always be the case, hiring new employees can be extremely costly - on average it will cost you $5,000 to hire a new employee, accounting for interviews, on-boarding, and training, not accounting for their salary - while the average time to fill a vacant position is around 70 days.
- Will you be able to continue business operations seamlessly?
One of your primary concerns will be running the business from day one. Ownership, assets, and employees will be important factors to enabling a smooth handover and continued operations.
If there are any hurdles to achieving this, you’ll want to address them during the research stage, and have a solid solution in place. At the very least, you’ll want to ensure that there are comprehensive and exhaustive training guides, operation manuals, and business procedure documents in place to avoid starting entirely from scratch.
- Are the P&L and business accounts accurate of the business operations?
If you move on from the initial questioning and research stage, and decided to proceed with purchasing the business, you’ll have the opportunity to examine the business’s financials to an exhaustive detail. However, in this initial stage, getting a clear picture of how the business operates financially will guide your eye during the later examination of the business financials.
If the owner is hiding issues within the business, or making the business appear more profitable than it really is, then you’ll want to understand why this is. Is it to increase the sale price of the business? Is it to rush a sale? Or is it because they have seen a change in the market and know the business will no longer be profitable in a few years? Ensure you have all the facts before moving forward to the next stage of purchasing the business.
Once you feel you have a complete and transparent understanding of why the vendor is choosing to sell the business, it’s time to do some research of your own. Ideally, you’ll want to already have a solid foundation of knowledge about the industry the business operates in and how it will continue to function and make profit with you as the owner.
You will get a chance to scrutinise the financial records of a business before you commit to purchasing it
How to assess an existing business for purchase
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.
- Visit the business and speak to employees and customers
Employees will be the driving force behind business operations, but customers will 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?
- Understand the market
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. What is it doing differently to stand out and continue thriving? Are there new products or services being introduced overseas or in the local market that may be disruptive to the current business plan? 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 finance statements used by businesses:
- Balance Sheet - a current view of business finances
- Profit and Loss Statement - business performance over a period of time
- Cash Flow Statement - income and expenditure, this will show money coming in and money going out, and will help identify issues with the business that may be preventing growth
How to buy an existing business with no money
If you want to buy an existing, established business but don’t have the money to do so, you could still qualify for a loan by using collateral - such as your home. It’s important to remember that providing personal collateral, or a personal guarantee, is not to be undertaken lightly. You’ll need to ensure the business you are purchasing will not only continue to operate smoothly, but generate enough profit for you to cover your loan repayments for the entire loan term.
Although putting up personal collateral can be a risky move for the borrower taking finance to buy the business, it will undoubtedly help you receive a lower interest rate on your loan.
Be cautious when using your personal property as collateral on a loan to finance the purchase of an existing business. If the business goes under and you can no longer meet your repayments, the lender may be able to take your home
Where to get finance for an existing business purchase
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:
- Non-bank lenders
- Specialist finance lenders
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. Our ultimate guide to business loans will help you understand how to compare lenders for business loans when looking to purchase an existing business.
How to get a loan to buy a 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:
- The structure of the existing business
- The location of the existing business
- The industry the business operates in, and how long it has been operating
- The turnover and profit of the business
- The value of any assets owned by the business
- Any current debts or loans taken out by the business
- A detailed business plan stating how acquiring the business will enable you to repay the loan amount
Your business plan will be a crucial aspect of this process, both for you and the lender, and should clearly outline:
- A deep understanding of the industry, market and competitors relevant to the existing business
- The position of the existing business within the market and its future
- Any significant challenges faced by the business, and detailed strategies that will ensure you are able to identify and solve any problems that arise
- Clear and transparent figures relating to business turnover and cash flow, and how you plan to manage cash flow to maintain or improve profits for the business
- Short, medium, and long-term business goals, including the timeframes for reaching each and how you plan to measure business performance to monitor and adjust goals as required
- How you plan to operate the business, to both ensure you make the most of current resources and assets, and remaining competitive in a changing market
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, and 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.
A solid and extensively detailed business plan is a crucial part of the loan application process
Loan options to finance the purchase an existing business
Secured Business Loans
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
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.
You can read more about applying for this type of finance in our unsecured business loans guide.
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.
You can learn more about how equipment finance works in our equipment finance guide.
Invoice finance allows you to sell your outstanding invoices to a third party and receive a large portion of the invoice upfront - between 70 and 90% of the invoice amount. If the business you are purchasing predominantly uses invoices to charge customers for its services and products, this could be a useful way to both raise the final amount of finance for your purchase, and cover cash flow during the first months of operation under new ownership.
You can learn more about invoice finance and factoring in our invoice finance guide.
Peer-to-Peer Lending - also known as P2P lending or Marketplace Lending - involves using an intermediary platform which connects borrowers with investors - i.e. lenders. Lenders can be either individuals or companies, and the peer-to-peer platform is designed to match borrowers with suitable investors. For borrowers, P2P lending works in a similar way to traditional loans; you will borrow an amount of money and repay the amount plus interest over a set term.
The main benefit of P2P lending is that your level of risk - and therefore the interest rate applied to the amount you are borrowing - will be based on your personal borrower profile and credit rating. This makes them an appealing option to lenders without extensive supporting documentation looking to find a competitive rate on their loan.
When using a P2P lending platform, the details of both borrowers and investors are kept entirely confidential
Purchasing an Existing Business Summary
Purchasing 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.
Purchase of an existing business FAQ
Is buying an existing business a good idea?
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.
Is it better to buy an existing business or start a new one?
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.
How do I purchase an existing business?
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.
How much does it cost to buy a business?
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.
Can you get a business loan to buy an existing business?
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.