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