How to Buy a Business: A Comprehensive Overview

As the commercial property market begins to pick up the pace, our latest blog details everything you need to know about purchasing a business and commercial owner-occupier property.

The commercial sector has faced its fair share of challenges over the past few years. From the pandemic closing down the high streets and the cost-of-living crisis limiting the amount customers spend, commercial and owner-occupier investors have shown considerable resilience over the past few years. Now, as the market settles, it’s important for those considering investing in a business and commercial property to understand what the sector looks like, and what you can expect with your mortgage application.

In this blog, we explain what you need to consider if you’re purchasing a business with commercial property, or commercial property from which to run your existing business. This process is different from buying a commercial investment property, which is rented out to a commercial tenant.

What you need to consider when deciding on a business purchase

It’s important to take into account your professional skillset and sector experience when considering a business purchase. Lenders typically require relevant sector experience for owner-occupier commercial mortgage applications, so demonstrating your expertise within the industry could help move your process along. For example, if you’ve had experience as a manager in a restaurant, these skills could apply to a guest house or hotel business.

If you don’t have any direct experience in the sector you’re interested in, then perhaps you know someone who does. They can then join your company as a Director or Shareholder, which will give lenders more confidence in the stability of your application. It’s important to note that sector-specific skills will be essential for businesses in the care home or day nursery sectors.

How to find a business to purchase

If you don’t have a business already, the first step will be to find one to purchase. Registering with business transfer agents and local estate agents will ensure you receive details of relevant businesses for sale and help you set up viewings more quickly. It’s important to remember that some agents may require you to have pre-qualified for commercial finance, so it’s worth contacting a reputable broker at the start of your business acquisition journey.

As a general rule, try to view as many target businesses as possible. This will give you a better idea of the location, the competition, and the potential for your prospective business.

Due diligence when purchasing a business

Once you have found a business and conducted your competitor research, you will need to request the past three to four years’ accounts to ascertain the profitability. You will then need to calculate the adjusted net profits, averaged over a three-year period:

What lenders look for on your commercial mortgage application

Lenders like to lend to businesses that produce enough adjusted net profits to service the commercial mortgage. You will need to provide your personal drawing requirements, which you can complete on an income and expenditure form. This will state, for example, if you live off-site and need to service your residential mortgage commitments or other monthly or annual personal expenditure. Lenders will also want to know if you intend to leave your current employment to operate the new business, as they will then deduct your personal drawing requirements from the adjusted net profits.

It's worthwhile to request the management information from the last year-end to date or, alternatively, the last three to four quarters’ VAT returns. This will tell you and the lender about the business’s current operating performance and whether there has been a dip in either turnover or profitability.

Making an offer for a commercial business

Once you have viewed the property, assessed the competition and are happy the business accounts are in good order, you should be ready to make an offer. You should be able to do this via the business transfer agent, subject to a professional business appraisal and valuation. The agent may require a letter of comfort from your broker or an agreement in principle from a lender.

If the offer is accepted, your broker will make the necessary full mortgage application on your behalf to a number of reputable lenders. Commercial mortgage rates are often negotiable with some lenders so it’s vital you find an experienced broker to access the very best deals in the marketplace.

What documents do you need to provide on your commercial mortgage application?

As with any mortgage application, the better prepared you are for your application, the quicker and easier the process will be for you. Typically, you will need to provide the following documents:

• Mortgage application form (fact-find)
• Copies of three months’ personal bank statements
• Proof of income for the past three years.
• Assets, liabilities, income and expenditure statement (ALIE form)
• Financial accounts: Past four years and management information for the target business or VAT returns
• If you already trade another business – three years’ accounts and three months’ business bank statements for this business
• A property portfolio schedule (for example, if you own rental investment properties)
• ID (copy passport and a recent utility bill)

Why use a broker for a commercial mortgage application?

For the most part, pricing with commercial lenders is negotiable. Rates can depend on several factors, such as a lender’s appetite within a specific sector, the perceived risk of the deal, the loan to value, and debt service cover.

You can classify lenders into two brackets: Firstly, the High Street lenders or building societies that you’re more likely to recognise. Then, you have the challenger banks, who tend to be more comfortable with complex lending and can take a more relaxed attitude regarding the debt service cover calculations.

Using a specialist and expert broker means they can compare your options. With the negotiable nature of these types of deals, a good broker is much more likely to have established relationships with the key lenders that can help on your case.

To get started and speak to one of our expert commercial brokers, call us on 0345 345 6788, or submit an enquiry here.

28th June 2023