Buying a business and the freehold together

A contract for a freehold business usually apportions the price between land and buildings, plant and equipment, and goodwill, with stock added at valuation on settlement. The lender follows that split. The land and buildings support a commercial property loan, usually over 15 years or more, sometimes up to 25 or 30. The business component is funded, if at all, by a separate business loan over a shorter term, commonly 5 to 10 years. Plant can sit on equipment finance. Each facility has its own term and pricing, but they are approved together and secured together.

Owning the freehold makes the business easier to fund. There is no landlord, no lease expiry and no rent review that can undermine the goodwill, and the lender holds a first mortgage over real property and does not have to rely on a general security agreement alone. Servicing is tested across the whole package. The assessor takes the business's maintainable earnings before rent, since the owner will no longer pay it, and checks they cover the repayments on all facilities. The general approach is set out on the page about buying business premises.

For standard commercial property such as a warehouse, office, shop or medical suite bought by an owner-occupier, most lenders commonly fund up to around 65% to 70% of the valuation. Some lenders go higher for strong borrowers or with residential property as extra security. The LVR is measured against the lender's valuation, not the contract apportionment. If the contract puts $1.5 million on the property and the valuer says $1.3 million, the loan is sized on $1.3 million and the difference falls into the goodwill that the buyer has to fund.

Specialised property attracts lower or more conditional LVRs. For freehold going concerns such as motels and purpose-built childcare centres, lending of up to around 60% to 70% of the going concern value is commonly quoted, and service stations and regional assets often sit lower. Where the business is bought without the land, lending against the leasehold alone is commonly capped at around 50% in the industries lenders accept, and is not available at all in many others. That is why buyers with the choice often find the freehold purchase easier to finance than the leasehold.

Motels, caravan parks, childcare centres, service stations, pubs and similar assets are built for one use. Their value comes from the trade they produce, so valuers assess them as a going concern. The valuer works out maintainable earnings from two to three years of trading figures, adjusts for an owner's wage and for costs that are out of line, and applies a capitalisation rate drawn from comparable sales. Childcare valuers also check the result against a value per licensed place. The single figure covers land, buildings, plant and goodwill together, and the valuer may then apportion it.

Lenders instruct valuers from their own panel who specialise in the asset type, and they expect the vendor to hand over detailed trading data: occupancy and room rates for a motel, enrolments and staffing ratios for childcare, fuel volumes and shop sales for a service station. Many lenders also ask for a value on a vacant possession or alternative use basis, to see what the property is worth if the business stops trading. A wide gap between the two figures means more of the price is goodwill, and the lender will be more conservative. An acquisition loan for a business with property is sized on the lender's valuation, not the agent's appraisal.

The sale of a business, including its premises, can be GST-free if it qualifies as the sale of a going concern. In broad terms the Australian Taxation Office requires that the sale is for payment, the purchaser is registered or required to be registered for GST, both parties agree in writing that the sale is of a going concern, and the seller supplies everything needed to keep the business operating and carries it on until the day of sale. If the conditions are not met, GST may apply to the price, and the buyer may have to fund it at settlement and claim it back later. Some lenders offer a short-term facility for that.

Transfer duty applies to the property in every state and territory, and some states and territories also charge duty on business assets such as goodwill. On a freehold going concern that is a large cost and it sits outside the loan with most lenders, so it needs to be in the funding table from the start. How a contract apportions the price, and whether the going concern treatment holds, are tax and legal questions with real money attached. Buyers should get accountant and legal advice on both before signing, not after.

Many buyers hold the freehold in one entity, such as a trust or a separate company, and run the business in another, with a lease between the two at market rent. The usual aim is to keep the property apart from trading risk and to make a later sale of the business simpler. Lenders are used to this. They lend to the property owning entity, take a mortgage over the property, and take guarantees from the trading entity and the directors, so the whole group stands behind the debt. Servicing is assessed on the group's combined figures.

A self managed super fund can buy business real property and lease it to a member's business, provided the lease is at market rent and properly documented. The fund borrows under a limited recourse borrowing arrangement, SMSF commercial property loans commonly sit at lower LVRs of around 60% to 70%, and the fund buys the property only, not the business. The fund's property also cannot be used as security for the trading business's loan, so the goodwill still needs separate funding. This is an area for licensed financial advice and specialist SMSF accounting advice.