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I want to buy a business with finance. What do I need to do?

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Buying a business with finance is the simplest way to go about it, other than the buyer fronting up the cost themselves.

Depending on the amount involved in the transaction, you will need unsecured or secured finance from a specialist lender. The typical ceiling for unsecured finance is around £25,000 so most acquisitions will involve secured finance.

Lenders prefer secured finance for larger amounts because the amount is secured against property as a failsafe. This fact means you enjoy lower rates versus unsecured finance which will drive the total cost of purchase down.

Here’s what you need to do to get started:

Get the business valued

To raise finance with any lender you need a solid valuation of the business. Valuating a business is not a simple exercise so should be outsourced to an independent, reputable evaluator. And always, always get a second opinion. Only when you understand the value of the business should you proceed.

Raise your own money

It’s important you know that with any business purchase you need your own money too. Lenders are unlikely to fund the whole purchase price. You must assume some of the risk. 30% is the golden figure to aim for – that’s 30% of the total purchase price of the business in question. And the higher the better.

Collect financial information

Lenders will want a high level of insight into the business being purchased. They will want to review the business’s unaudited and audited accounts and review bank statements to determine solvency. Also, they will want to determine the financial status of the group or individuals buying the business. This is necessary for due diligence.

Demonstrate skills and knowledge

Lenders base their lending decisions on risk. Someone who knows what they are doing, either through experience or study, is far less of a risk than someone who doesn’t have any experience or knowledge. A cover note detailing your experience and how it is relevant to a takeover goes a long way to providing reassurance.

Create a professional business plan

Just because you are buying an established business this does not mean it will continue to be successful. To show it will be, a professional business plan is absolutely necessary to answer the lender’s questions and reassure them. You need to explain how funds will be used and how the business will be run. You also need a forecast, profit and loss account, up to date balance sheet and cash flow figures.

Find yourself the best possible finance

The quality of a finance product is determined by the lender, but there are variables you can try negotiating or tweaking to your needs. Fees, rates, payments and early settlement charges are the four variables in question. These differ from lender to lender. Do shop around for the right product but save your applications for the good ones (if you apply for finance too many times in a short period, this can count against you).

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