Buying a business without one giant loan

Buying an established business is one of the biggest goals an owner can fund, and one of the most rewarding to remix. Unlike a start-up, the business already earns money — and that track record, the seller’s confidence and the assets that come with the sale can all become pieces of the funding mix.

What does buying a business really cost?

The agreed price is the headline. The full cost usually includes:

• the purchase price for goodwill, plant and equipment;
• stock, often bought at valuation on top of the price;
• working capital — the cash to pay wages, rent and suppliers while customer payments flow through to you, which can take weeks;
• legal, accounting and due diligence fees;
• any GST, depending on how the sale is structured;
• changeover costs: signage, systems, rebranding, a few weeks of your time without pay.

Plenty of buyers fund the price beautifully and then run short in month two. Build the working capital into the mix from the start.

Which pieces can fund a business purchase?

Piece	What it does	What to watch
Your own cash	Shows commitment; reduces borrowing	Don’t spend your safety buffer on the deposit
Vendor finance	Seller is paid part of the price later	Must be documented; seller may keep security until paid
Earn-out	Part of the price depends on future performance	Clear targets and accounting rules matter
Partner or investor equity	Shares the risk and the upfront cost	You share ownership and decisions
Business loan	Funded on the business’s cash flow	Lenders want strong, verifiable earnings
Property-secured funding	Larger amounts, longer terms	Your property is on the line

Ask the seller to stay in the mix

business.govt.nz suggests offering a gradual handover where you pay off part of the price from profits, noting some sellers prefer this because it gives them confidence in the buyer. Vendor finance shrinks the cash you need on day one and keeps the seller interested in a smooth transition. It needs a careful sale agreement — the payment schedule, what happens if the business underperforms, and any security the seller keeps.

Bring in a partner if the numbers are big

If the price is more than your deposit and borrowing can comfortably carry, a partner or investor can take a share of the business in exchange for capital. That’s a permanent trade-off, so weigh it against a longer-term loan.

Use the business’s own cash flow

Lenders funding a business purchase look closely at the business’s historical earnings, your experience in the industry and the transition plan. The more clearly you can show the business will service the repayments, the better. A one-page funding plan helps you present that.

Illustrative mix: buying a Nelson bakery

Illustrative only; describes no real business.

A buyer agrees to purchase an established bakery in Nelson for $420,000, plus stock at valuation of about $15,000 and a working capital target of $40,000.

• Buyer’s cash: $90,000.
• Vendor finance: $80,000, paid over two years from profits, documented in the sale agreement.
• Property-secured funding against the buyer’s home: $280,000.
• Remaining working capital: covered by the business’s opening bank balance and a small line of credit for the first quarter.

The buyer avoids an unrealistic single loan for the full amount and keeps a buffer for the first few months. If you’re working through a purchase now, you can have a real person look at the borrowing piece before you commit.

What due diligence protects your funding?

business.govt.nz recommends checking pending court cases or disputes, confirming the business owns its key assets, and reviewing contracts with staff, customers, suppliers and the landlord. Two checks matter especially for your funding mix:

• PPSR search. The Personal Property Securities Register shows financing statements registered against personal property such as equipment and vehicles. If a lender or supplier has a registered interest, you want it discharged at settlement.
• Lease assignment. If the landlord won’t assign the lease on acceptable terms, the business may not be worth what you’re paying.

Have a lawyer draft or review the agreement and an accountant review the books. For franchises, use a franchise lawyer.

When is a loan the right piece for a purchase?

A loan or property-secured facility fits when the business has steady, verifiable earnings that comfortably cover repayments, when vendor finance and your own cash have already done their part, and when there’s a clear plan for the first year of ownership. Stress-test it with the repayment load test — assume a slower first quarter than the seller’s figures suggest.

How do you avoid overpaying with borrowed money?

A purchase funded largely by debt leaves little room for error, so the price matters even more. A few safeguards:

• Base the price on cash, not just profit. Ask how much of the reported profit actually turns into cash after the owner’s wages, equipment replacement and working capital.
• Normalise the owner’s role. If the seller works 60 hours a week unpaid, the business needs to fund a manager or your time.
• Check customer concentration. If a few customers make up most of the revenue, their loyalty to the seller is a risk.
• Look at the last 24 months, not the best 12. Seasonal or one-off spikes can inflate a single year.
• Plan the first 100 days. Lenders and vendors both feel more confident when the handover is mapped out.

The less the price depends on optimism, the safer any borrowed piece of the mix becomes.

Ready to fund the purchase gap?

Once your deposit, the seller’s contribution and any partner equity are clear, the remaining gap is the number to fund. Tell us about the purchase and the gap and a real person will call you to work through it. There’s no credit check to start, and your details aren’t sprayed around a crowd of lenders. Please complete the form carefully — the price, stock, working capital and any property you can use all shape the right route.