Business Acquisition Finance

Key takeaways

• Goodwill is rarely acceptable security on its own.
• Lenders assess normalised earnings, not the vendor's stated profit.
• Vendor finance bridges the gap and aligns the seller with the outcome.
• An earn-out ties part of the price to the business actually performing.

Why is goodwill hard to finance?

Because security is about what can be recovered when things go wrong. Property can be sold. Equipment can be sold. Goodwill - the value of customer relationships, reputation and earnings capacity - typically evaporates in exactly the circumstances where the lender needs to realise it.

So a lender looks past the purchase price to what it could recover. If a business sells for $1.2 million comprising $300,000 of equipment and $900,000 of goodwill, the lender is thinking about the $300,000.

That gap is why business acquisitions are typically funded from several sources at once, and why buyers with residential property to offer as security have a structural advantage over those without.

How is the funding usually structured?

Vendor finance deserves particular attention. A seller genuinely confident in the business should be willing to leave part of the price on the table, repayable over a period after settlement. A seller who refuses any deferred component is telling you something worth listening to.

What does the lender check in the target?

Three years of financials, normalised - meaning adjusted to remove the vendor's personal expenses, one-off items and above or below-market owner salaries, so that what remains is what the business genuinely earns.

• Customer concentration - a business where one client is 40% of revenue is a very different risk.
• Owner dependence - if the relationships belong to the departing owner, the goodwill may leave with them.
• Lease security - a short remaining lease term on critical premises undermines everything.
• Key staff - whether they are staying, and whether they are bound by anything.
• Working capital - the business needs funding on day one and the acquisition loan rarely covers it.
• Restraint of trade - what the vendor is prevented from doing, and for how long.

Do proper due diligence with an accountant and a lawyer before committing. The cost of that work is small against the purchase price, and it is the stage at which problems can still change the deal rather than merely explain the loss.

Frequently asked questions

Can I get a loan to buy a business with no property?

It is considerably harder, because goodwill is poor security. Options include vendor finance, funding against the business's tangible assets, a larger cash contribution, or specialist lenders - generally at higher cost.

What is vendor finance?

An arrangement where the seller accepts part of the purchase price over time after settlement, rather than all at completion. It bridges the funding gap and signals the seller's confidence in the business continuing to perform.

What is normalised earnings?

The business's earnings adjusted to remove the owner's personal expenses, one-off items and any above or below-market owner remuneration, so the figure reflects what the business genuinely produces for a new owner.

What is an earn-out?

A structure where part of the purchase price depends on the business achieving agreed performance after settlement. It reduces the buyer's risk on goodwill and keeps the vendor invested in a smooth handover.

Related reading

• Franchise Finance in Australia
• Secured vs Unsecured Business Loans: Which Should You Take?
• Merchant Cash Advance: The True Cost

Sources

• Buying a business — business.gov.au
• Moneysmart - business finance — ASIC