What Lenders Consider For Business Purchase Finance
Buying a business can be one of the most exciting and complex financial decisions you’ll make. Whether you’re stepping into your first business, expanding your existing portfolio, or taking over a competitor, securing finance is often an important part of the journey.
Lenders play a critical role here, but before they’ll fund a purchase, they need to be confident that the business is viable and that you, as the buyer, can manage it successfully. Below are the key business elements a lender will carefully assess when reviewing a business purchase application.
The Financial Performance & Value of the Business
The first step for any lender is to understand the business’s historical financials. They will typically request and review:
Profit and Loss Statements (usually for the previous 2 years)
Balance Sheets
Tax Returns
Cashflow Statements
Lenders are particularly interested in sustainable profitability and strong cash flow. Even if the business has had growth, they’ll want to confirm that this growth is backed by solid fundamentals rather than one-off events.
A common measure used is EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), as it gives a clearer picture of the business’s core earnings. Sometimes, lenders will also consider “add-backs” – adjustments for non-recurring expenses or owner-related costs – to assess the true ongoing earning potential.
This helps them determine how much debt the business can realistically service.
Using the Financial Performance and EBITDA, lenders will either calculate their own valuation of the business (generally a multiple of EBITDA plus the value of any equipment and stock included in the sale) or engage a panel Valuer to provide a Valuation. They will compare the agreed purchase price with the business valuation to ensure it’s a fair deal. If you’re paying significantly above valuation, they’ll want to understand why.
2. Industry and Market Outlook
A strong business in a declining industry can raise red flags for lenders. They’ll look at the broader market conditions, growth potential and risks within the industry.
For example, businesses in traditionally essential industries (such as healthcare, professional services or certain trades) may be viewed as lower risk to the lender than other industries that may be impacted by market fluctuations. This doesn’t mean that lenders won’t consider ‘riskier’ industries, but they may need more comfort around the strength of the particular business you’re seeking funding to buy.
3. The Buyer’s Experience and Capability
Your background and ability to operate the business are just as important as the financials. Lenders want to know:
Do you have relevant industry experience?
Have you run or managed a business before?
Do you have a strong advisory team (accountant, broker, mentor) supporting you?
What level of due diligence have you undertaken on the business you’re hoping to buy? Do you have a strong understanding of the business?
A lender is more likely to back a buyer who demonstrates both capability and commitment.
4. Business Structure and Transition Plan
Lenders will also assess how the business purchase is structured. Is it a share purchase or an asset purchase? How will ownership transition from the current operator to you? Will the current operator remain in the business for a period of time to support handover? Is there are restraint on the outgoing owner to prevent them from establishing another, competing business close by?
Lenders want reassurance that customer relationships, key staff, and supply contracts will continue under new ownership. A clear transition plan helps reduce perceived risk.
5. Funding Mix and Security
Finally, lenders will look at:
Equity contribution: How much are you contributing personally versus what is borrowed?
Security available: Will the loan be secured by business assets, personal property, or a mix?
Debt serviceability: Does the business’s cash flow comfortably cover the new loan repayments?
The stronger the funding mix and the lower the reliance on leverage, the more comfortable a lender will feel.
Securing finance for a business purchase is about more than just showing numbers – it’s about presenting the business as a viable, sustainable investment and demonstrating that you’re the right person to lead it.
By preparing clear financials, understanding the valuation, having a strong business plan, and leaning on professional support, you’ll put yourself in the best position to get your purchase funded.
Contact Grace to gain access to the right Business Finance lenders today!