I need to buy a business

How do people actually fund a business purchase?

In real life, most small business sales in New Zealand aren’t funded by a bank loan against the business itself. Goodwill — the value of the customer base, brand and reputation — is hard for lenders to secure. So buyers typically combine:

• their own money (savings, or money from selling something else);
• borrowing secured on property they already own — the family home, a rental, commercial property or land;
• sometimes vendor finance, where the seller agrees to be paid part of the price over time.

A property-secured business loan from $20,000 up to $1m, as a first or second mortgage, is often the piece that makes the numbers work. Because the lender focuses on the property, you don’t need to supply your own financials or tax returns for the initial assessment.

What should I check before I buy?

Business.govt.nz describes due diligence as understanding “what assets, liabilities and commercial potential a business has”. In practice, that means:

1. The real numbers. Ask for at least two to three years of financial statements, GST returns and bank statements, and have your accountant reconcile them. Cash businesses that “don’t declare everything” are a red flag, not a bonus.
2. The lease. How long is left, what are the rights of renewal, and will the landlord consent to assigning it to you? A great business on a short lease is a short business.
3. The equipment. Is it owned outright? Search the PPSR for security interests over key assets.
4. The people. Will key staff stay? What do their employment agreements say?
5. The customers and suppliers. Is revenue concentrated in one or two customers? Are supply terms transferable?
6. Disputes and debts. Any claims, tax arrears or unresolved issues?

Your sale and purchase agreement should include a due diligence period, a restraint of trade on the seller, and clear terms on stock, staff and settlement.

Make your offer conditional on finance and due diligence. It costs nothing to include and protects you if something turns up.

How much of my own money should I put in?

There’s no single rule, but the more you put in, the lower your repayments and the more breathing room you’ll have in the first year — which is when new owners learn the most expensive lessons. Keep a working capital buffer too. Owners who spend every last dollar on the purchase price often struggle in the first few months while they learn the business.

What happens with property security when buying a business?

If you use your home or another property as security, the lender will register a mortgage over it. If there’s already a bank mortgage, the new loan can sit behind it as a second mortgage. Depending on the lender and your existing mortgage, the first lender may need to be told or consent. Anyone who owns the property — including a partner or trust — will need to be part of the process and should get independent legal advice.

Is buying a business a good idea right now?

That depends on the business, not the headlines. The Reserve Bank’s recent Financial Stability Reports note that many smaller firms have been under pressure from soft demand, which can mean more businesses for sale and more room to negotiate — but also more tired businesses dressed up for sale. Do the homework.

How LendFriend helps

Tell us about the business, the price and what you’ve got to work with. We’ll look at your situation, match you with a lender from our panel that’s comfortable with business purchases, and help you line the funding up with your settlement date. You decide, with your lawyer and accountant in your corner.

Start your enquiry — it takes about 60 seconds.