How to fund a business purchase

How do you fund the purchase of a business?

Most business purchases are funded by a combination of three things: the buyer’s own money, finance from a lender, and sometimes finance from the seller. How the mix looks depends on the size of the deal, how strong the target business is, what the buyer can offer as security and how much experience the buyer brings.

Business.gov.au lists loans, angel investors, hire purchase, chattel mortgage and leasing among the funding options for starting or buying a business. In practice, most buyers of established small and medium businesses rely on a business acquisition loan, often secured against property or the business assets, with a personal contribution on top.

The first decision is not the loan. It is whether the business is worth what is being asked. Funding a poor purchase well is still a poor purchase, which is why due diligence comes before finance and not after.

What should you check before you borrow?

Business.gov.au describes the steps for buying an existing business: check you are business ready, find the right business, research it, value it, conduct due diligence, make an offer and sign a written contract. Lenders will expect to see evidence that the buyer has done the middle steps properly.

Its due diligence checklist includes:

• Licences and permits. Are they current and transferable?
• Contracts and leases. Will the landlord transfer the lease or require a new one?
• Supplier agreements. Are any obligations outstanding?
• Equipment and fixtures. Are they in good working order and properly licensed?
• Assets and intellectual property. What does the business actually own?
• Inventory. Is it included, and what condition is it in?
• Liabilities. Debts, refunds, warranties and any amounts secured against assets on the Personal Property Securities Register.
• Financial records. Three to five years of tax returns, BAS, balance sheets, profit and loss statements, cash flow statements, receivables, payables and sales records.

A lender will want the same records to assess the loan, so the work does double duty. For a fuller list of what lenders ask for, see our business loan documents checklist.

What do lenders look for in a business acquisition loan?

Lenders assess a purchase differently to a standard business loan, because they are lending on a business the buyer has not yet run. The main questions are:

1. Does the target earn enough? Lenders look at the historical earnings and whether they can support the repayments after the buyer takes over.
2. Is the price supported? The purchase price needs to stack up against earnings, assets and comparable sales. A professional valuation may be recommended.
3. Does the buyer have relevant experience? Running a hospitality venue is different from running a trade business. Industry experience weighs heavily.
4. How much is the buyer contributing? A larger contribution reduces the lender’s risk and often improves access.
5. What security is available? Goodwill is hard to secure, so lenders often want property, equipment or other assets as well.
6. What happens if the transition goes badly? Lenders look at the plan for handover, staff, suppliers and customers.

Our page on business acquisition loans covers how these loans are typically structured.

Why is goodwill a problem for funding?

When you buy a business, part of the price is usually goodwill: the reputation, customer base and earning power that is not a physical asset. Goodwill is hard to value and impossible to repossess in the usual sense, so lenders do not treat it like a building or a truck.

That is why acquisition loans often require additional security. Common solutions include:

• Property security. The buyer, or a family member, offers real estate they own.
• Business assets. Plant, equipment and stock being acquired, along with a registration on the PPSR.
• A larger buyer contribution. Cash or equity in other assets.
• Vendor finance. The seller carries part of the price, so less needs to come from the lender.

The less the price is backed by hard assets, the more the lender will lean on the buyer’s security and the business’s cash flow.

What are the main ways to structure the funding?

Structure	How it works	Where it tends to fit
Business acquisition loan	Term loan to buy the business, secured over assets or property	Established businesses with solid earnings
Loan secured by property	Buyer or director uses a property as security for the purchase	Where the business assets alone are not enough
Vendor finance	Seller is paid part of the price over time	Deals where the seller wants to help or the buyer is short on cash
Asset finance for equipment	Equipment finance covers the physical assets	Businesses heavy in plant and vehicles
Bridging finance	Short-term funding until a property sale or other event	When timing is tight and an exit is clear
Franchise finance	Specialist lending that understands franchise models	Buying into an established franchise network

These are not exclusive. Many deals use two or three together. For example, equipment can be financed separately, with a smaller acquisition loan covering the goodwill and stock. See franchise finance and bridging finance for more.

How do GST and transfer duty affect the cost?

Two tax items can change the amount you need to fund. Neither is a substitute for advice from an accountant or lawyer, but both are worth raising early.

GST. The ATO states that no GST is payable on the sale of a going concern if certain conditions are met. The conditions are set out in a ruling, GSTR 2002/5, and they are technical. Whether a sale qualifies is something to confirm with an adviser before the contract is final, because it affects the cash needed at settlement.

Transfer duty. The rules are set by each state and territory. Revenue NSW, for example, says land, interests in land (including leases) and fixtures are dutiable, while goodwill, intellectual property, stock-in-trade and debtor receivables are not. It also says the buyer pays the duty, and that duty is due on the earlier of settlement if land is involved, or three months after signing. Other states have their own rules, so check the relevant revenue office.

Both of these can alter the real price. A buyer who funds the headline figure and forgets about duty and GST can face an uncomfortable gap.

How does vendor finance work?

Vendor finance means the seller accepts payment in stages. Instead of receiving the full price at settlement, they receive part at settlement and the rest over an agreed period.

It can help in several ways:

• It reduces the cash the buyer needs up front.
• It signals the seller’s confidence in the business.
• It can keep the seller involved through a handover period.

It also has to be handled carefully. The terms need to be in a written contract, the security position needs to be clear, and a primary lender may need to consent. Vendor finance can sit alongside a bank or non-bank acquisition loan, but the two lenders’ rights need to be sorted out so they do not clash.

Illustrative example: buying a local trade supplies shop

This is an illustrative scenario only. A buyer with ten years in the building industry wants to purchase a local trade supplies shop. The seller is retiring, the shop has three years of consistent tax returns and BAS, and the lease can be assigned. The price covers stock, fittings and goodwill.

A broker would typically help the buyer confirm the figures, check the lease, and work out what share is stock, equipment and goodwill. The buyer has equity in a family home. A structure might use that property as security for the acquisition loan, with stock and equipment noted on the PPSR, and the seller agreeing to a short handover period. The contribution, security and experience all support the lender’s view. Whether it works depends on the numbers and the lender, which is why the first conversation is about the evidence, not the loan.

What if you cannot get approval from a bank?

Not every buyer fits a mainstream lender’s box. A newer business, a thin deposit, a credit blemish, or a purchase of a business with irregular records can all lead to a decline.

The alternatives include:

• Specialist or non-bank lenders who assess the deal more flexibly.
• Private lending against property, where the property’s equity does the heavy lifting. See private mortgages.
• Low-doc routes when records are limited. See low doc business loans.
• A bigger contribution or partner to reduce the amount borrowed.
• A staged purchase, where the buyer takes over in stages as the finance falls into place.

Each option has trade-offs in cost, term and risk, and none is guaranteed.

What mistakes do business buyers make?

• Signing before finance is clear. Contracts should be conditional on finance and due diligence where possible.
• Underestimating the cash needed. Duty, legal costs, working capital and a buffer all add up.
• Skipping the lease check. A business without a secure lease is a risky purchase.
• Relying on the seller’s numbers alone. Independent accounting review is a common safeguard.
• Ignoring the PPSR. Hidden security interests can complicate title to assets.
• Overpaying for goodwill. Price should reflect evidence, not hope.
• Starting without working capital. The first months after takeover are often the tightest.

How does Ownright help fund a business purchase?

Ownright Custom Finance arranges business and commercial finance Australia-wide from its Knoxfield, Victoria head office. Director Trevor Scott has more than 40 years in finance, and the team is used to deals that do not slot neatly into one lender’s policy.

In practice, Ownright works on the whole funding picture rather than the loan in isolation: how the purchase price splits between goodwill, stock and equipment, what security is available, where vendor finance might help, and which lenders are comfortable with the story. When a bank has said no or the structure is unusual, Ownright looks for solutions others do not know exist. It cannot promise approval, and every loan is priced on the borrower’s circumstances.

How long does it take to organise finance for a purchase?

Timing is the part that catches buyers out. A seller may want a quick answer, but a lender needs time to review the target’s records, order any valuations and complete legal checks. Contract conditions often set the clock, so the sequence matters.

A workable order for most buyers runs like this: gather the target’s records and your own, have an accountant review the numbers, speak to a broker about realistic structures, and only then make a firm offer with finance and due diligence conditions built in. Lenders and valuers move at different speeds, and delays on any one of them can push settlement out.

Speed is sometimes possible, particularly with private and specialist lenders when the security is clear, but it depends on the lender, the security and how quickly documents arrive. It is wise to talk through a realistic timetable before the contract is signed rather than after.

What happens after settlement?

Funding the purchase is not the end. The first months after takeover tend to be the tightest, with staff to retain, customers to reassure, suppliers to renegotiate and repayments starting. Working capital is the usual shortfall, so it is worth planning for it as part of the original funding rather than discovering the gap later.

Many buyers include a working capital component in the acquisition structure, or arrange a line of credit alongside the loan. Others keep a buffer from their own funds. Whatever the method, a plan for the first quarter of trading, including how repayments will be met if sales dip during the changeover, gives lenders confidence and gives the buyer room to breathe.

What is the next step?

If you have a business in your sights, start an application with the basics: what the business is, the asking price, what you can contribute and what you could offer as security. We can talk through realistic structures before you commit to a contract. And if time is tight, talk to us about your situation early, since finance conditions often drive the timetable.