Funding a Business Acquisition of an existing business

Funding a Business Acquisition

Funding a Business Acquisition of an existing trading business can be split into 3 main areas:

Buying a Business which includes the Freehold Premise which the business trades from
Buying a Business which includes buying a Short Leasehold, which normally has no longer than 15-years to expiry will be perceived as having little or no value to a potential lender
Buying a Trading Business which trades from a leased premise

When looking to secure business finance for the purchase of existing trading businesses, it is significantly easier to fund a property purchase than a business with few assets.

If you are buying a business trading from freehold premises a professional report will be obtained to verify the overall value of the business goodwill etc which is sometimes referred to as ‘market value’ or MV1. Generally banks will provide 65% of MV1 and this may seem the best way to raise the highest sum of money possible even compared with a higher LTV property loan, but in fact, this may not be the best way to minimize your “cash” contribution if this is the route you wish to take. Funding across multiple assets will be more expensive but can generate a higher percentage of the business sale price.

Types of Business Purchases and Funding Options

Although we have considered utilizing the trading value of a business – its goodwill – to increase the level of borrowing available there are other options which can be used to help minimize the “cash” contribution to the purchase.

Using a Businesses’ assets to fund its purchase
Directors Loans
Working Capital held in the Company Account
Physical Assets and Machinery
The Business’ Debtor Book

Buying a Business which includes buying a Short Leasehold

Typical businesses would be – Pubs, Fast Food Outlets, Convenience Stores etc. Unlike the above business purchase, with Leasehold Business Finance there will no Bricks and Mortar security involved.

The Short Leasehold does not offer any security value to a lender, therefore, the lender will consider other forms of security such as:

Personal Guarantees provided by the borrower i.e. the borrower has a strong Net Worth
Additional Property such as 2nd charges over the borrower’s residential property
Strong past experience of the borrower in operating the type of business being purchased
Good trading accounts from the business to demonstrate affordability
Comfort from the lease being purchased (e.g. an established franchise operation such as McDonalds, Kwik Print etc.)

Buying a Trading Business which trades from a leased premises

The only difference between this type of purchase and the previous type is the client is taking over a lease from which the present business trades.

The lender assessment will be very similar to the above assessment, although a lender will need to know the remaining term of the lease.

This will be critical compared to the required term of the facility with loans always being of a significantly lower term than the lease has left to run (generally half) i.e. lease has 10-years to run, maximum loan term 5-years.

Other services that might be of interest

Commercial Mortgages

A commercial mortgage is similar to a residential mortgage, except the collateral is security over the Freehold or long Leasehold of a commercial building.

Asset Finance

In theory, it is possible to lease almost anything, from equipment valued at a few thousand pounds to assets worth millions.

Factoring / Invoice Finance

Invoice Finance works particularly well for expanding businesses. Increased turnover produces a larger debtor book which in turn produces more funding for working capital.