Buying a business | #eBizEntrepreneur | Robynne Erwin

Buying a business

Finance for buying an existing business is treated differently from finance to start a business.  Unlike a Start-up, the business exists and it is easy to check its past financial trading history and the future orders it has already secured, and this make lenders more comfortable.

If you are a previously disadvantaged South African citizen who wishes to buy an existing business, then Government Lending Agencies may be your best bet for raising finance.

Different types of funding

The structure of the purchase of the business invariably dictates the type of funding you can apply for.  There are lenders that specialise in Management buyout, BEE Shareholding purchases as well as business acquisitions.  These types of transactions still involve buying a business, but they are treated differently to a transaction whereby an individual is purchasing an existing business.  So, it is important to understand how lenders will view the transaction as this enables us to select the most appropriate lender for your needs.

What are your options?

Business Acquisition Funding

If your growth plans involve acquisition rather than organic growth, then you can apply for growth funding provided that the financials of both companies (your existing company and the one you wish to acquire) clearly show that the sale will result in increased profits.  However, financials only tell one side of the story, so be prepared to provide detailed acquisition plans that show how you intend to retain key staff members and explain what economies of scale will be realised by the acquisition.  Funding options include loans, equity or debt/equity.

BizEntrepreneur-on-BizRadio-600x250Robynne Erwin in conversation with eBizRadio’s Nic von Stein

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Management Buyout and BEE Shareholding purchase

If the Management Buyout is not being made by previously disadvantaged people, then the same principles apply as for Business Acquisition Funding.  In the case of the purchase being made by previously disadvantaged people, then government funding may be the best option.  Whilst government funding is there to ensure that SA has an inclusive economy, the lenders still need the reassurance that the buyout will result in a viable business that is able to service the loan.  Thus, historical financial are important as is the future order book.  In some cases, management buyouts include a commitment by the existing owner to procure work from the new owners and this makes lenders more comfortable about loaning the money for the purchase.  They will need assurances that the team buying the business has the skills required to keep the business running efficiently and will expect a detailed business plan and CVs of the management team.

Government Funding Agencies also provide funds to enable non-transformed businesses to bring BEE shareholders on board.  The type of funding will largely depend upon the type of business, its performance to date and its growth expansion projections. Like any type of finance, the key is to provide sufficient surety to mitigate the risk of lending the finance.

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