Documents lenders need to fund a business purchase

The contract of sale, or a signed heads of agreement if the contract is not yet drafted, tells the assessor exactly what is being bought and for how much. They read the apportionment between goodwill, plant and equipment, and stock, because each is funded differently. They look at the settlement date, any finance or due diligence conditions, the vendor's handover and training period, the restraint of trade clause, and how employee entitlements are adjusted. Any vendor finance or earn-out must appear here. A lender can give an indicative answer on a heads of agreement, but formal approval of a business acquisition loan needs the contract.

If the business is a franchise, add the franchise agreement, the disclosure document and the franchisor's written approval of the buyer. The assessor checks the term remaining, renewal rights, transfer fees, refurbishment obligations and what the franchisor can do on default. The loan term will normally have to fit within the franchise term. If the purchase is of shares in a company and not of business assets, the lender will also want the company's own balance sheet, tax position and details of every liability the buyer is inheriting.

Two to three years of the vendor's profit and loss statements, balance sheets and tax returns are the core of the file. The assessor is looking for the trend in revenue and margins, not just the latest year, and compares the accountant prepared financials with the lodged tax returns to confirm they match. Business activity statements for the quarters since the last financial year end bring the picture up to date and provide an independent check, because the sales figures in them were lodged with the Australian Taxation Office. A business with falling BAS turnover will be asked to explain it.

The add-backs schedule is the bridge between reported profit and the price. It lists expenses that will not continue under the new owner, such as the vendor's personal vehicle, one-off legal or repair costs, interest on the vendor's own debt and wages paid to family members who do not work in the business. Each line needs evidence. The assessor will accept the ones they can verify, remove the ones they cannot, and deduct a market wage if the vendor has not paid themselves one. The method is close to how lenders treat add-backs for self-employed income. The adjusted figure then has to cover the proposed repayments, commonly by 1.25 to 1.5 times.

For a business in rented premises, the lease is as important as the financials. Goodwill tied to a location is worth little if the right to occupy runs out. The assessor checks the term remaining plus options, and generally wants that to cover the loan term. They also check the rent and review mechanism, outgoings, make good and demolition clauses, the landlord's consent requirements for assignment, and any personal guarantees or bank guarantees the landlord will require. Provide the full signed lease, any variations and the landlord's agreement in principle to assign it or grant a new one.

The plant and equipment list should show each major item, its age and whether it is owned outright or under finance. Items under finance have to be paid out by the vendor or taken over by the buyer, and a search of the Personal Property Securities Register will show which is which. The lender uses the list to decide what can go on separate equipment finance. The stock list or stocktake method shows how stock will be valued at settlement and whether any of it is old or slow moving. Stock is normally paid for on top of the price, so it affects the funds needed on the day.

The asset and liability statement sets out what the buyer owns and owes: property, savings, superannuation, vehicles, home loans, credit cards, personal loans and any guarantees given. It shows where the contribution is coming from and what security is available. Most business purchases in Australia are funded against property, so expect to provide rates notices, loan statements and details for a valuation of any property offered. The lender also assesses the buyer's personal living costs and existing commitments, because the business has to pay the owner enough to cover them. Personal tax returns or payslips for the last two years support that.

A CV is not a formality. Lenders are reluctant to fund a buyer with no experience in the industry, however good the business looks on paper. The assessor wants to see that the buyer has run a similar business, managed staff and budgets, or worked in the trade. Where experience is thin, a strong handover period, a retained manager, franchisor training or a business partner with the right background can close the gap. Licences and qualifications needed to operate, such as a liquor licence approval, a real estate licence or professional registration, belong in this part of the file.

The business plan should be short and specific: what is being bought, why this buyer can run it, what will change and what will stay the same, who the key staff, customers and suppliers are, and what the main risks are. The cash flow forecast should cover at least the first 12 months, month by month, starting from the vendor's actual figures and showing the new loan repayments, the owner's drawings, tax and GST payments, and any seasonal pattern. Assessors distrust forecasts that show sales jumping under new ownership. A forecast built on the existing numbers with stated assumptions is far more persuasive.

Entity documents confirm who the borrower is. For a company, that means the certificate of registration and details of directors and shareholders. For a trust, the full stamped trust deed and any variations. The lender needs the ABN and GST registration, and will ask for guarantees from directors and often from related entities. Every borrower and guarantor must be identified under anti-money laundering rules, usually with a passport or driver licence plus a second document. The general documents needed for a loan checklist covers the identification and property documents in more detail.