Key Takeaways
- Business acquisitions can be financed up to 100% for strong performers with good security
- Goodwill-only purchases require specialist lenders who understand intangible value
- Vendor finance is common and can bridge gaps between bank lending and purchase price
- Lenders assess both historical performance and your capability to maintain/grow it
- Due diligence costs ($10,000-30,000+) should be budgeted separately
- Deal structure affects both finance availability and your tax position
Buying an existing business offers significant advantages over starting from scratch - established customers, trained staff, proven systems, and immediate cash flow. But financing an acquisition requires lenders to assess both the business's value and your ability to successfully operate it.
At Mortgage & Finance Advisory, we help clients across Victoria finance business acquisitions from small service businesses to substantial enterprises. Understanding how lenders evaluate acquisition opportunities - and structuring deals to improve finance prospects - often determines whether a purchase proceeds.
What Are You Actually Buying?
Business acquisitions comprise various elements, each valued and financed differently.
Goodwill
The intangible value representing the business's ability to generate profits above a normal return on tangible assets. This includes customer relationships, brand reputation, systems and processes, staff expertise, and market position. Goodwill often represents 50-80% of small business purchase prices.
Plant and Equipment
Tangible assets like machinery, vehicles, computers, and furniture. These can be valued independently and often serve as security for finance. Equipment in good condition with remaining useful life supports stronger lending positions.
Stock and Inventory
Current trading stock is typically valued at cost and purchased separately or adjusted at settlement. Obsolete or slow-moving stock should be negotiated down or excluded.
Property (If Included)
Some acquisitions include freehold property. This significantly changes the finance structure, often improving borrowing capacity as property provides strong security.
Intellectual Property
Trademarks, patents, proprietary systems, and other IP may have independent value. Specialist valuations can support finance against these assets.
| Business Type | Typical Goodwill Multiple | Key Value Drivers |
|---|---|---|
| Accounting Practice | 0.8-1.2x annual fees | Recurring revenue, client retention |
| Cafe/Restaurant | 1.5-3x annual profit | Location, lease terms, brand |
| Retail Store | 1-2.5x annual profit | Foot traffic, lease, online presence |
| Trade Business | 1.5-3x annual profit | Contracts, equipment, reputation |
| Professional Services | 0.8-1.5x annual revenue | Client relationships, staff |
| Manufacturing | 3-5x annual EBITDA | Equipment, contracts, IP |
How Lenders Assess Acquisitions
Historical Financial Performance
Lenders typically want 2-3 years of financial statements showing consistent or growing profitability. They'll look behind the numbers to understand add-backs (owner salary, one-off expenses), normalised earnings, trends in revenue and margins, and customer concentration risks.
Your Capability
Even a profitable business can fail under new ownership. Lenders assess your relevant industry experience, business management background, planned involvement level (full-time operator vs. passive owner), and any staff retention arrangements with key employees.
Deal Structure and Security
The security available significantly impacts borrowing capacity. Property security (business premises or your home) typically enables higher LVRs. Equipment and stock provide secondary security. Personal guarantees are almost always required. Goodwill-only security limits options to specialist lenders.
The 50% Rule: As a rough guide, many mainstream lenders will finance up to 50% of goodwill value without additional property security. Specialist business lenders may go higher for strong performers, while property-backed acquisitions can reach 100% finance.
Finance Structures for Acquisitions
Bank Business Loans
Major banks offer business acquisition facilities, typically requiring property security for larger amounts. Terms range from 5-15 years depending on the asset mix. Rates are competitive but approval criteria are strict.
Specialist Business Lenders
Non-bank lenders specialising in business finance often take a more flexible approach to goodwill lending. Higher rates reflect higher risk tolerance, but they may approve deals banks decline.
Vendor Finance
The seller provides part of the purchase price as a loan, repaid over time. This is extremely common in business sales, often comprising 20-40% of the price. Vendor finance demonstrates seller confidence in the business and bridges gaps between bank lending and purchase price.
Earnout Arrangements
Part of the purchase price depends on post-sale performance. This reduces upfront funding requirements and shares risk between buyer and seller. Earnouts are common when there's disagreement on value or concern about customer/staff retention.
Client Success Story
A professional couple acquired a $1.2M accounting practice. We structured $700,000 bank finance secured against their home equity, $350,000 vendor finance over 4 years, and $150,000 from personal savings. The vendor finance interest rate was below bank rates as the seller wanted to ensure successful transition.
The Acquisition Process
1. Initial Assessment
Before serious negotiation, understand your finance capacity. We can provide indicative approval based on your financial position and the type of business you're targeting. This prevents wasted effort pursuing businesses beyond your reach.
2. Letter of Intent/Heads of Agreement
Once you've identified a target business and agreed on key terms, a non-binding agreement outlines the deal structure and provides exclusivity while you conduct due diligence.
3. Due Diligence
Comprehensive investigation of the business covering financial verification and analysis, legal review of contracts, leases, and compliance, operational assessment, customer and supplier relationships, and staff arrangements and liabilities. Budget $10,000-30,000+ for professional due diligence depending on business complexity.
4. Finance Application
With due diligence complete and the deal confirmed, formal finance application proceeds. Lenders will want the due diligence reports along with their standard requirements.
5. Settlement
Funds flow, ownership transfers, and you take control. Ensure adequate working capital is available from day one - settlement is the starting point, not the finish line.
Due Diligence is Non-Negotiable
Skimping on due diligence to save costs or speed settlement is the most common mistake in business acquisitions. Problems discovered after purchase become your problems. Spend appropriately on professional review.
Common Acquisition Finance Challenges
Goodwill-Heavy Businesses
Service businesses, practices, and agencies often have minimal tangible assets. Financing relies heavily on cash flow serviceability and your capability to maintain it. Specialist lenders and vendor finance typically feature in these deals.
Owner-Dependent Businesses
When the current owner IS the business (key customer relationships, technical expertise), lenders worry about value evaporating post-sale. Transition periods, earnouts, and consulting arrangements can address this concern.
Declining Performance
Buying a business with dropping revenue or profits requires explaining your turnaround plan. Lenders are skeptical of "I can do better" claims without evidence. The purchase price should reflect current performance, not hypothetical improvements.
Lease Risks
For location-dependent businesses, lease terms are critical. A short remaining lease or unfavourable renewal conditions can undermine value and finance approval. Negotiate lease assignment and extension before committing to purchase.
Frequently Asked Questions
Possible with strong property security (your home or business premises) and a well-performing business. Without property, expect to contribute 30-50% through cash, vendor finance, or other means.
Allow 4-8 weeks from application to settlement for straightforward deals. Complex acquisitions, multiple lenders, or challenging circumstances may extend this significantly.
Relevant experience significantly improves approval prospects and may be required for larger acquisitions. Some lenders will consider strong general management backgrounds, especially with vendor transition support.
You remain liable for the finance regardless of business performance. Personal guarantees mean your personal assets are at risk. This underscores the importance of thorough due diligence and conservative projections.
SMSFs can acquire businesses, but strict rules apply and finance options are limited. The business generally can't involve related parties or provide direct benefits to members. Specialist SMSF advice is essential.
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