Funding a Business Purchase: Your Options

Few small business purchases are paid for entirely in cash. Most combine the buyer's own money with borrowing, and sometimes with part of the price paid to the seller over time. Knowing your options before you make an offer helps you move quickly and makes your offer more convincing to the seller.

Your own stake

Lenders and sellers want to see that you are putting your own money in. The amount varies, but expect lenders to look for a meaningful share of the price from you. Remember to keep money back for legal and accountancy fees, stock, working capital and a cushion for the first few months, which are often the hardest.

Bank and specialist business loans

High street banks and specialist lenders lend for business purchases, usually secured on the business's assets, and often with a personal guarantee. They will look at:

• the business's accounts and whether its profit can comfortably pay the loan
• your experience and your plan for the business
• the lease, if it is leasehold, including how long it has left
• what security is available

Commercial mortgages are used where the purchase includes freehold property. A broker who specialises in business finance can save you time by knowing which lenders favour which sectors.

Asset finance

Equipment and vehicles can sometimes be financed separately through hire purchase or leasing, which reduces the amount you need to borrow for the rest of the price.

Seller finance and deferred payments

Sellers sometimes accept part of the price after completion, paid in instalments over an agreed period. This is often called vendor finance or deferred consideration. It reduces the money you need on day one, and it shows the seller has confidence in the business. It needs a clear written agreement, covering what happens if payments are late, and your lender will want to know about it.

An earn-out links part of the price to how the business performs after the sale. It can bridge a gap between what the seller wants and what you will pay, but needs careful drafting so that both sides agree how performance is measured.

Investors and partners

Friends, family or business partners can provide part of the funding in return for a share of the business or as a loan. Put any arrangement in writing, including what happens if someone wants to leave.

Before you make an offer

• Speak to a lender or broker early, so you know roughly what you can borrow.
• Have your own funds ready and be able to show where they come from.
• Prepare a short CV and a simple plan for the business: lenders and agents take buyers with both more seriously.
• Ask your accountant how the purchase should be structured for tax.

Agents often ask about your funding before sending detailed information, because sellers want to deal with buyers who can complete. Being ready makes you that buyer.