Business Acquisition Lending
Financing the purchase of an existing business is different from applying for a standard business loan.
The lender is assessing whether the business can support the proposed debt under new ownership. They will also consider the price being paid, the buyer’s experience, their financial contribution and the security available.
While every application is different, these are some of the main factors lenders will consider:
The business's financial history
Lenders will review the historical financial performance of the business, usually across several financial years together with the latest available management accounts.
They will look for consistency in revenue, profitability and cashflow. Where the results have fluctuated or recently declined, the lender will want to understand what caused the change and whether it is likely to continue.
A longer history of stable performance can provide greater confidence that the business will continue generating sufficient income after the change in ownership.
Business earnings and cashflow ability
The reported profit is only the starting point.
Lenders will assess the underlying earnings of the business and whether there is enough surplus cashflow to meet the proposed loan repayments. They may adjust the reported results for owner salaries, personal expenses, one-off costs or other items that may not continue under the new ownership structure.
Any adjustments need to be reasonable and supported by the financial information.
The lender will also allow for the buyer’s income requirements, tax, existing commitments and the working capital needed to operate the business. This means a profitable business may not necessarily support the full amount the buyer wants to borrow.
The purchase price
The purchase price will be considered against the earnings generated by the business.
A higher purchase price generally means more debt and a greater reliance on the business continuing to perform at its current level. If the price is high relative to the underlying profitability (EBITDA), the lender may require a larger buyer contribution or a different funding structure.
Industry risk
The type of business will also influence the assessment. Some industries are viewed as more stable, while others may carry greater risk due to seasonal trading, customer concentration, economic sensitivity or reliance on key staff.
These factors can affect how much a lender is prepared to provide and the conditions attached to the approval.
Strength of the borrower (equity and experience)
Lenders are not only assessing the business. They are also assessing the buyer.
Relevant industry, management or business ownership experience can strengthen an application because it gives the lender greater confidence that the business can be successfully operated after settlement.
The lender will also consider how much the buyer is contributing toward the purchase. This could come from cash, property equity, investor funds or other available resources.
Available security can also affect the lending options. Residential property, commercial property or business assets may be used to support the application. However, security does not replace the need for the business to demonstrate sufficient cashflow to repay the debt.
How we help at Vive Capital
There is no single formula for determining how much someone can borrow to purchase a business.
Different lenders can assess the same transaction differently depending on the business, the buyer, the available security and the proposed structure.
Depending on the transaction, the funding may include a combination of business lending, property-backed lending, asset finance, vendor finance or working-capital facilities.
A commercial finance adviser can help assess the likely funding position, identify suitable bank and non-bank lenders, structure the lending and prepare the information required for the application.
At Vive Capital, we help buyers understand their business acquisition finance options and manage the lending process from the initial assessment through to settlement.
This article provides general information only. Lending criteria, terms and approval outcomes will vary between lenders and individual transactions.