Business acquisition loans: borrowing to buy a business that already trades

When you buy a running business, you’re really buying its future profit. Lenders know this, so an acquisition loan is assessed almost entirely through one lens: will the business you’re buying, run by you, earn enough to repay the money used to buy it? Everything else (the deposit, the security, the paperwork) flows from the answer.

What does an acquisition loan pay for?

The headline price usually bundles several things, and lenders treat each one differently:

• Goodwill. The reputation, customer base, systems and location that let the business earn more than its assets alone would. business.gov.au notes goodwill is notoriously hard to value, and lenders find it hard to lend against for the same reason: a lender can’t pick goodwill up and auction it.
• Plant and equipment. Vehicles, machinery, fit-out. Easier to finance, and often better split off into equipment finance.
• Stock. Usually adjusted at settlement based on a count on the day.
• Premises, if the freehold is part of the deal. That’s a commercial property loan, financed separately.
• Working capital so wages and suppliers are covered while ownership changes hands.

How do lenders size a business acquisition loan?

They start from the target’s earnings, not the price. Expect a lender to work through these steps:

1. Verify the profit. Three or more years of tax returns, financial statements and BAS, cross-checked against bank statements. Sales the seller says “don’t go through the books” count for nothing.
2. Normalise it. Adjust for one-offs and owner-specific costs, known as add-backs: the outgoing owner’s car, a family member on the payroll, a one-off legal bill. Add-backs need evidence; a lender who spots one padded figure will start doubting the rest.
3. Deduct a real wage. If the seller worked 60 hours a week unpaid, the lender subtracts the cost of replacing that labour, whether that’s you or a manager.
4. Test serviceability. The adjusted profit, usually expressed as EBITDA, must cover all loan repayments with a buffer. Lenders call this the debt service coverage ratio. Our DSCR calculator runs the same test.
5. Look at security. Business assets, a general security agreement over the company, director guarantees and, in many cases, a mortgage over property to cover the goodwill.

What lenders check

Area	What they want	Why it matters
Financial history	3+ years of returns, P&L, balance sheets, BAS	Proves the earnings are real and consistent
Customer concentration	No single customer dominating revenue	One lost client shouldn’t sink repayments
The lease	Long enough to cover the loan term, and assignable to you	No premises, no income
Your experience	Industry or management background	Profit depends on who runs it next
Contribution and security	Your cash plus assets or property	Protects against goodwill falling in value
Sale contract	Restraint of trade, handover period, stock terms	Stops the seller opening across the road

Due diligence a lender will expect you to have done

The federal business.gov.au guidance points buyers to a look-back of between three and five years across the tax returns, BAS, sales records, debtor and creditor ledgers and the core financial statements, and it encourages you to verify the figures independently instead of trusting the seller’s summary. It also flags a PPSR search, which reveals whether a financier or supplier already holds a registered interest in the assets on offer. Any such interest over equipment you’re paying for has to be released at settlement.

The Business Queensland due diligence checklist adds useful items for any state: existing loans and overdrafts, debtor finance facilities, payroll and PAYG obligations, and the business’s standing with the ATO. Employee entitlements, licences and whether key staff are staying all affect value too.

A lender reading your application will notice whether this work has been done. Thorough homework costs little and lifts the odds noticeably.

Buying with a settlement date already set? Let us know the details and we’ll tell you which lenders can realistically meet it. Sending it is quick, and your credit file isn’t touched.

Closing the gap: vendor finance, earn-outs and property

Few buyers fund an acquisition from one loan. Common building blocks:

• Vendor finance. The outgoing owner accepts a slice of the price in instalments after settlement. Lenders usually want it to rank behind them, but it reduces what they’re asked to carry and shows the seller’s confidence.
• Earn-outs. A portion of the price is only paid if revenue or profit reaches agreed levels in the first year or two, which protects you if the seller’s forecasts were optimistic.
• Property security. A mortgage over a home or investment property lets a lender cover the goodwill portion. For quick settlements, a private or non-bank lender can fund against property while a longer bank loan is arranged.
• Equipment finance. Pulling the hard assets into a separate facility can shrink the main loan noticeably.

A worked example

A buyer in Newcastle is purchasing an established commercial cleaning business for $950k, including $120k of vehicles and equipment and $30k of consumables stock.

• Reported EBITDA over the last two years averages $305k.
• Add-backs the accountant can document: $18k (the seller’s car and a one-off legal cost).
• Less a market wage for a full-time operations manager, since the seller worked in the business full time: $95k.
• Adjusted EBITDA: $228k.

The buyer has $250k cash. The seller agrees to $150k of vendor finance over two years. Equipment finance covers $100k of the vehicles. That leaves $450k for an acquisition loan, which a lender secures over the business and a second mortgage on the buyer’s home. With the lender’s estimated yearly repayments across all three facilities at about $170k, coverage is roughly 1.34 times: a comfortable result for many lenders. Had the buyer relied on the seller’s unadjusted EBITDA, the plan would have looked far stronger on paper than it really was.

Costs to budget beyond the price

• Solicitor and accountant costs for checking the books and drafting the sale contract
• Stamp duty, which in some states applies to business assets such as goodwill as well as land
• Lender establishment, valuation and legal fees
• Stock adjustment at settlement
• Working capital for the first two or three months, while customers and suppliers get used to new ownership

Ready to put a number on your purchase?

You’ve done the hard part by finding a business worth buying. The next job is a structure that settles on time and leaves the business room to breathe in year one.

That’s where we come in. The enquiry is roughly a sixty-second job, and making it leaves no footprint on your credit report. We keep your file in-house rather than circulating it to every lender in town. A specialist studies the deal and phones you to discuss the options. Put down the real price, profit and contribution, because honest figures let us match a workable structure on the first attempt.

Talk to us about funding the purchase →