How much deposit do you need to buy a business?

The deposit is whatever the lender will not fund, so it moves with the security. Where the only security is the business itself, most lenders advance up to about 50% of the price and the buyer finds the rest. In favoured sectors such as medical, dental and accounting practices, pharmacies, childcare centres, rent rolls and accredited franchises, lenders commonly fund 50% to 70%, leaving a contribution of 30% to 50%. Specialist healthcare lenders sometimes go further for qualified practitioners. For general retail and hospitality, lenders often want 30% to 40% or more from the buyer and may still ask for property security.

Where property is offered, the calculation changes. The lender looks at the value of the property and not the price of the business. Residential security commonly supports lending up to 80% of value and commercial property 65% to 70%. If the available equity is large enough, the buyer may not need any cash deposit for the business itself. The lending ranges for each security type are compared on the loans to buy a business page.

Goodwill is the part of the price paid for customers, reputation and earning power. It cannot be repossessed and sold the way a building or a truck can. If the business fails, the goodwill is usually worth nothing, so a lender that relies on it wants the buyer to carry a large share of the risk. A 40% to 50% contribution also lowers the repayments, which improves the cover between maintainable earnings and debt. Lenders commonly look for earnings of 1.25 to 1.5 times the annual repayments, and a smaller loan makes that test easier to pass.

Many buyers have equity but not cash. A worked example shows how it is measured. A home valued at $1,000,000 with a $400,000 loan has lending capacity to 80% of value, or $800,000. The available equity is $400,000. That amount could fund a 50% contribution on an $800,000 business, or the full price of a $400,000 business. The lender must still be satisfied that the borrower can service both the existing home loan and the new debt.

The equity is usually drawn as a separate loan split so the business debt is kept apart from the home loan. Lenders ask what the funds are for and will want the sale contract and the business financials. The risk is that the home now secures a business debt. The mechanics, the differences in loan terms and the consent issues for co-owners are covered in using home equity to buy a business.

Where the buyer is short, the vendor can sometimes bridge the gap by leaving part of the price in the deal. Vendor finance is commonly 10% to 30% of the price, repaid over one to five years. It has limits. A senior lender will usually require the vendor's debt to rank behind its own, and will include the vendor repayments when testing serviceability. Many lenders also do not count vendor finance as the buyer's own contribution, so some genuine cash or equity is still expected. Earn-outs work differently. Part of the price is deferred and paid only if agreed performance targets are met, which reduces the amount needed at settlement.

The deposit is not the only cash needed. Stock is often paid for separately at valuation on settlement day. The landlord may require a rental bond or bank guarantee, commonly several months of rent. Legal fees, accounting due diligence, lender establishment fees and valuation fees all fall due before or at settlement. Franchise purchases can add training and transfer fees. Transfer duty can apply to some business assets depending on the state or territory, which is a question for your solicitor. Lenders also check that the business will have enough working capital after settlement, because a buyer who puts every dollar into the deposit has no buffer for the first slow month.