Most buyers do not fund an acquisition entirely from their own cash. They piece it together from a combination of sources: bank debt, vendor finance, earn-outs, or equity from a third party. Understanding how these structures work, and how they interact with each other, is one of the most practical things a buyer can do before they start serious negotiations.
This article covers the main financing options available to business buyers in Australia, when each one makes sense, and the key considerations around deal structure and repayment capacity.
Why financing structure matters
How you finance an acquisition affects more than just the upfront cost. It affects your cash flow on day one, your risk exposure if the business underperforms, your relationship with the vendor, and your ability to invest in the business after settlement.
A buyer who funds an acquisition entirely from cash has maximum flexibility but ties up capital that might be better deployed elsewhere. A buyer who takes on too much debt may find the repayment schedule constrains their ability to manage the business through any early bumps.
The right structure depends on the size of the acquisition, the quality of the business’s earnings, the vendor’s willingness to participate in the financing, and the buyer’s own risk tolerance. There is no single right answer, but there are structures that are clearly wrong for specific situations.
The financing structure is part of the due diligence process. Before you commit to a price, you need to know that the repayment schedule is viable given the actual earnings of the business you’re buying.
Before you finance a purchase, make sure the price is right. See how EBITDA multiples affect what a business is really worth.
Bank and commercial lending
Bank debt is the most common primary source of acquisition finance for SME transactions in Australia. The major banks and specialist commercial lenders will fund business acquisitions, but the amount they’re willing to lend, and on what terms, depends heavily on the quality of the business.
What lenders look at
Lenders assess serviceability based on the business’s ability to generate enough cash flow to service the debt. They’ll want to see:
- Three years of financial statements showing consistent earnings
- Normalised EBITDA adjusted for owner wages, one-off items, and related-party transactions
- The loan-to-value ratio based on the purchase price and asset backing
- The buyer’s personal financial position and any guarantees required
- Industry risk as some sectors are considered higher risk than others
Lenders will typically want the debt service coverage ratio, the ratio of earnings to debt repayments, to be comfortably above 1.25x, meaning the business generates at least 1.25 AUD for every 1.00 AUD of annual debt repayment.
Security requirements
For a business acquisition, lenders will generally require security over the business assets and, in many cases, a personal guarantee from the buyer and potentially a registered mortgage over real property.
The security position matters for the buyer’s risk exposure. Understanding what you’re guaranteeing, and what happens if the business underperforms, is something to work through with both your accountant and your lawyer before you sign.
Goodwill as security
Banks are cautious about goodwill as security. Unlike plant and equipment, goodwill can evaporate if the business loses key clients or the owner exits badly. Lenders will often apply a lower lending ratio against the goodwill component of the purchase price than against tangible assets.
This is one of the practical reasons why the split between goodwill and identifiable assets matters in a transaction, it directly affects how much a bank will lend.
Vendor finance
Vendor finance is when the seller provides part of the purchase price as a loan, effectively allowing the buyer to pay a portion of the price over time rather than in full at settlement.
It’s more common than most buyers realise, particularly in smaller transactions and situations where the vendor has a genuine interest in the buyer’s success.
Why vendors agree to it
A vendor who agrees to provide finance isn’t being generous; they’re making a commercial calculation. Vendor finance can:
- Attract a wider pool of buyers who can’t fund the full purchase price upfront
- Signal confidence in the business’s continued performance
- Command a higher headline price (buyers may accept a higher total cost in exchange for lower upfront outlay)
- Create alignment: a vendor who’s still owed money has an incentive to support a smooth transition
The risks for both parties
For buyers, vendor finance adds a creditor relationship on top of the commercial relationship. If the business doesn’t perform and you miss payments, the consequences are serious.
For vendors, the risk is obvious: you’ve effectively provided an unsecured loan to someone who is now running a business you no longer control. Security arrangements, covenants, and clear default provisions are essential.
The terms of vendor finance, interest rate, repayment schedule, security, default provisions, should be documented carefully in the sale agreement. This is not something to leave to a handshake.
Earn-out arrangements
An earn-out is a mechanism where part of the purchase price is contingent on the business hitting performance targets after settlement. The buyer pays a base price now and additional amounts later, if the business performs.
When earn-outs work
Earn-outs are most commonly used when:
- There’s a significant gap between the vendor’s price expectations and what the buyer can justify based on current earnings
- The business has strong projected earnings, but the buyer wants proof before paying for them
- The vendor is staying on post-settlement, and their effort directly affects the outcome
- There’s a key contract or renewal that could significantly affect business value and is pending at the time of sale
The structural challenges
Earn-outs introduce complexity and risk for both parties. The key issues:
- How is performance measured? Revenue, EBITDA, client retention? The metric matters enormously
- What happens if the buyer makes decisions that affect performance, such as changing prices, adding headcount, or integrating with another business?
- Who controls the business during the earn-out period, and what decisions require vendor consent?
- What disputes arise if the vendor believes the buyer has managed the business to reduce the earn-out?
Earn-outs can create adversarial post-settlement relationships. They work best when both parties go in with clear eyes about the incentives at play and robust legal documentation around how the earn-out is calculated and disputes are resolved.
Earn-outs are common but they’re not simple. The disputes that arise from poorly structured earn-out arrangements are among the most expensive and damaging in small business M&A.
Private equity and equity partners
For larger acquisitions, or where the buyer wants to leverage the business beyond what debt alone allows, equity co-investment from a third party is an option.
Private equity firms active in the SME space will co-invest alongside a buyer who has operational expertise, funding a portion of the acquisition in exchange for an equity stake. The buyer gets the capacity to buy a larger business or preserve more of their own capital. The PE firm gets exposure to a business with an experienced operator at the helm.
This is less common in acquisitions under 5 million AUD but becomes more relevant in the 5 to 20 million AUD range, where the debt quantum starts to constrain what a single buyer can service.
Combining funding sources: the typical structure
Most acquisitions involve a combination of funding sources rather than a single one. A common structure for an SME acquisition in Australia looks like:
The specific split depends on the deal, the business, the lender’s appetite, and the vendor’s requirements. There’s no standard formula; the structure gets negotiated as part of the broader transaction.
Serviceability: can the business actually support the debt?
This is the question that determines whether a financing structure is viable, not just on paper, but in practice.
A business generating 400,000 AUD EBITDA that’s being acquired for 1.4 million AUD needs to service whatever debt is taken on. If bank debt of 700,000 AUD carries repayments of 120,000 AUD per year and vendor finance of 200,000 AUD adds another 40,000 AUD, total debt service is 160,000 AUD. That leaves 240,000 AUD, before the buyer takes a wage.
That math either works or it doesn’t. And it’s the first calculation any serious buyer needs to do before they agree to a price.
The serviceability analysis also needs to stress-test the assumptions. Revenue could come in 15 percent below the trailing 12 months. A key client might not stick around once ownership changes. Capital investment you didn’t plan for in year one can change the picture quickly.
This is exactly the kind of modelling that an independent accountant does as part of a buyer-side advisory engagement, and it’s the work that determines whether you’re buying a good business or an expensive one.
For a full overview of what buyer-side advisory covers, see our guide to buying a business in Australia.
Working with a finance broker
Most buyers of SME businesses work with a commercial finance broker alongside their accountant. The broker’s role is to find and negotiate the right lending facility. The accountant’s role is to make sure the numbers behind the loan application are accurate and that the overall financing structure makes sense.
These are complementary rather than competing roles. A finance broker doesn’t tell you whether the business is worth buying. An accountant doesn’t manage the lender relationship or know which banks have appetite for a specific industry at a specific deal size.
Getting both parties involved early, before you have a signed head of agreement, gives you the most options.
The role of due diligence in financing decisions
Financing decisions and due diligence are inseparable. The normalised EBITDA figure that drives valuation is the same figure that lenders use to assess serviceability. The risks identified in due diligence, such as customer concentration, key person dependence, or undisclosed liabilities, directly affect both the price you should pay and the amount you should borrow.
A business that looks like it earns 500,000 AUD EBITDA but has one client representing 40 percent of revenue is a different proposition from a business with distributed, contracted revenue at the same earnings level. The financing structure should reflect that difference.
Our financial due diligence services are designed specifically for buyers who want independent confirmation of the numbers before they commit.
The financing structure and the due diligence findings should inform each other. If due diligence reveals risks that weren’t in the information memorandum, the financing terms, including the price, need to reflect that.
Getting the structure right from the start
The financing decisions made at the start of an acqusition stay with the buyer for years. A structure that’s too aggressive creates cash flow pressure that limits the new owner’s ability to invest in, grow, or manage the business. A structure that’s too conservative means you’re potentially leaving returns on the table.
Getting independent advice before you’re committed, before the heads of agreement is signed, is when it matters most. Once you’ve agreed on a price and structure in writing, your negotiating position weakens significantly.
If you’re considering an acquisition and want to understand the financing options available, and whether the business can support them, book a free discovery call. We work with buyers across Australia to make sure the numbers behind the deal stack up before they commit.
Frequently asked questions
How much deposit do I need to buy a business in Australia?
There’s no fixed requirement, but most commercial lenders will want to see the buyer contributing at least 20-30% of the purchase price from their own funds. The actual requirement depends on the quality of the business, the asset backing, and the lender’s assessment of risk. Stronger businesses with tangible asset backing can sometimes support higher leverage.
Can I use superannuation to fund a business acquisition?
In limited circumstances, a self-managed super fund (SMSF) can invest in business real property or certain business assets. Using an SMSF to buy an operating business outright is generally not permitted under the ATO’s SMSF investment restrictions. This is a highly regulated area, specific advice from an SMSF specialist is essential before pursuing this route.
What is the difference between vendor finance and an earn-out?
Vendor finance is a loan. The vendor is owed a fixed amount that must be repaid regardless of how the business performs. An earn-out is contingent. The additional payment only happens if the business hits agreed performance targets. Both reduce the buyer’s upfront outlay, but they carry very different obligations and risks.
What happens to the financing if the business underperforms after I buy it?
The debt obligations don’t change if the business underperforms, you’re still required to service the loan. This is why serviceability analysis and stress-testing are critical before you commit to a price and financing structure. If the business can only service the debt under optimistic assumptions, the risk profile is much higher than it appears.
Should I involve my accountant before approaching a lender?
Yes. Before you approach a bank, your accountant should review the financial statements, normalise the earnings, and confirm what the business actually earns under sustainable conditions. A lender’s serviceability assessment is only as good as the numbers it’s based on. Walking into a lender with independently verified numbers gives you a stronger application and a more accurate loan quantum.
