How do lenders assess a business purchase?

When you’re buying an established business, lenders will generally look beyond the purchase price. They’ll want to understand how the business has performed historically, its ability to service the proposed debt, the strength and experience of the incoming owners, the security available and what the business will look like after the transaction.

The funding also doesn’t necessarily need to come from one source. Depending on the business and the transaction, the overall structure could include:

• Business term lending
• Asset finance against eligible equipment or vehicles
• Property-backed lending
• Your own contribution
• Vendor finance

The right mix can help reduce the amount of capital required upfront while making sure the resulting repayments remain manageable for the business.

How is a shareholder buyout funded?

Shareholder buyout funding can require a slightly different approach.

Unlike purchasing a truck, machine or property, there may be no new physical asset being purchased. The value may instead sit largely in the underlying business, its cashflow and goodwill.

That doesn’t necessarily prevent funding.

We can look at the existing business assets, current lending, property position, business performance and proposed ownership structure to identify where funding may be available and how the transaction could be structured.

Where can vendor finance fit into the deal?

Vendor finance can be particularly useful in business purchases and shareholder exits.

Rather than the purchaser paying the entire purchase price on settlement, the seller agrees to leave part of the purchase price outstanding and have it repaid over an agreed period.

For example, a transaction might be funded through a combination of purchaser equity, lender funding and a vendor loan.

This can help bridge the gap between what a lender is prepared to fund and the agreed purchase price, while reducing the amount of external debt required from day one.

The terms are important, however. A lender will usually want to understand how and when the vendor is repaid and whether those repayments sit behind the primary lender.

How important is the business valuation?

The price agreed between a buyer and seller is not necessarily the value a lender will use when assessing the transaction.

Depending on the size and nature of the deal, a lender may want an independent business valuation or further information supporting the purchase price — particularly where a significant proportion of the value relates to goodwill rather than tangible assets.

Getting this right early can help avoid a situation where a purchase price is agreed before anyone has considered how a lender is likely to view the value or fund the transaction.

What happens to existing guarantees and security?

A shareholder buyout can affect more than just the ownership of the business.

Existing lending may include personal guarantees or security provided by the outgoing shareholder, so part of the transaction may involve working through what needs to be released, replaced or restructured.

Depending on the transaction, lenders may also want to understand the existing shareholder arrangements, including how the shares are being transferred and what the ownership and management structure will look like once the transaction is complete.

This is another reason to involve your Finance New Zealand adviser early — we can look at the existing lending and security position alongside the proposed transaction, rather than treating the share purchase in isolation.

Why does choosing the right lender matter?

Every lender will have different credit criteria, appetite and preferences when it comes to business acquisition finance and shareholder buyout funding.

At Finance New Zealand, we have an in-depth understanding of different lenders’ current lending appetite, the types of transactions they are comfortable with and the areas they may be less willing to consider.

That means we can look at the transaction first, then identify which lenders may be the right fit and how the application should be structured and presented.

This can be particularly important where the transaction involves goodwill, vendor finance, business valuations, personal guarantees, limited tangible security or a change in management and ownership.

Some examples of where we’ve helped recently

Business Purchase – Tyre Business
Funding the purchase of an established tyre business using a combination of asset finance and purchaser equity.

Shareholder Buyout – Civil Construction
Structuring the buyout of an existing shareholder in a civil construction company, taking into account the business’s existing lending, assets, cashflow and security position.

Business Acquisition – Vendor Finance
Combining lender funding and vendor finance to help bridge the gap between the purchaser’s contribution and the agreed purchase price.

Share Purchase – Existing Shareholder
Funding an existing shareholder to increase their ownership in an established business, supported by the strength and cashflow of the underlying business.

If you’re thinking about buying a business or purchasing shares in an existing business, speak to your local Finance New Zealand adviser early to understand what funding options may be available and how the transaction could be structured.