Need a deposit for a business purchase? Move before a rival does

Why speed wins a business sale

Most businesses are not sold to the highest bidder. They are sold to the buyer the vendor believes will actually complete. Vendors and business brokers have met plenty of keen buyers who needed three weeks to find the money and then three more. A buyer who can put a deposit on the table this week is a different proposition from one whose finance is “being looked at”.

Speed pays off in three practical ways.

• Exclusivity. A firm offer with a deposit behind it is what usually earns an exclusivity or lock-up period, where the vendor agrees not to negotiate with anyone else while you complete due diligence. Without proof of funds you rarely get one.
• Credibility. A verified deposit tells the vendor you are serious. It gives the broker a reason to stop showing the business to other buyers.
• Certainty. A vendor who wants out will often trade some price for a buyer who can exchange quickly and settle cleanly. Certainty has a dollar value, and the buyer who offers it can negotiate harder.

None of this means rushing the checks. The point is to be ready with the money so the checks are the only thing that takes time. If you are still deciding whether to buy, our page on finance to buy a business sets out how the funding side fits together.

What the deposit is for, and what it is held against

A deposit is a part-payment of the price paid when contracts are signed. It does two jobs: it shows commitment, and it gives the vendor some security if the buyer walks away without a good reason. If the deal completes, it counts towards the price. If the buyer defaults, the vendor may be entitled to keep it. If a condition in the contract fails, a properly drafted contract returns it to you.

There is no standard percentage for a business sale. The amount is negotiated and written into the contract, and it varies with the price, the risk and the structure of the deal. Do not assume the figure you hear for property applies to a business. (For example, NSW Government guidance says a deposit at a property auction is usually 10 per cent, but that is a property convention, not a rule for business sales.)

Before you pay anything, settle four questions in writing:

• Who holds it? The deposit is normally held in trust, for example by a lawyer, agent or broker, not paid directly to the vendor.
• When is it released? On settlement, on satisfaction of conditions, or in stages.
• When is it refundable? List the conditions that bring it back to you.
• What counts as default? This is where deposits get lost.

Business Victoria’s buyer guide advises paying only once you hold the signed contract, and getting a written receipt (Business Victoria). Have a business lawyer read the contract before the deposit leaves your account.

Conditions that protect your deposit

The cheapest way to protect a deposit is to make it conditional. Typical conditions in a business sale include:

• Subject to finance. The contract ends, and the deposit returns, if finance is not approved by a set date. The date matters: finance has to be applied for in time and the condition has to be properly worded.
• Subject to due diligence. You get a window to check the numbers, the stock, the contracts and the liabilities. business.gov.au advises independently collecting and checking the financial information, and reviewing three to five years of records.
• Lease assignment or landlord consent. Ask whether the landlord will transfer the lease into your name, or whether you will need a new one. Without a lease you do not have a business.
• Licence and permit transfer. Confirm every licence is current and can be transferred or re-issued to you.
• Key contracts and supplier arrangements. Make the transfer of important existing contracts a condition.

How deposits are lost is usually dull. A condition expires and nobody notices. A buyer waives due diligence to look keen, then finds a problem. A finance condition was never properly applied for. Diarise every date in the contract, and ask your lawyer before waiving or extending anything.

If finance is the one that goes wrong, read our guide to what to do when finance falls through before settlement.

Fund the deposit now with equity, settle the balance later

The staged approach is simple. Use equity in property you already own to fund the deposit and early costs quickly, then refinance or settle the balance with bank or vendor finance when the deal reaches settlement.

Equity is the value of the property minus what you owe on it. Lenders lend against a portion of it, and they care about the exit as much as the equity. The exit is how the loan gets repaid, and for a deposit it is usually the bank finance or vendor finance on the purchase, or the business’s own cash flow once you own it.

Our property-secured business loans run from $20,000 to $5M. They are assessed on equity and the exit, with no financials or tax returns needed. Funding can happen in as little as 24 hours, and the median across our book is 36 hours (Funding Speed Report, 5,626 loans funded since 2012). Document readiness and signatories can add time, so start before you need the money.

• Property with equity and no first mortgage: a first mortgage is generally the lowest-cost option.
• Property with an existing mortgage: a second mortgage funded in as little as 24 hours sits behind your bank and leaves it undisturbed.
• Short bridge to a known repayment: bridging loans suit a deposit that will be repaid when a bank loan or a sale lands.
• Victoria: a caveat loan is available there only. Elsewhere the loan settles onto a registered second mortgage.

Our guide on how to unlock property equity for business explains the process in more detail.

A staged funding plan: what pays for what

A business purchase is not one payment. It is four, and each has a different job and a different source of money.

Most buyers fund stages one to three and forget stage four. Work backwards: decide how much cash the business needs to keep trading, then see what is left for the deposit and price. For growth after you own it, see funding for growth and expansion. If the premises are part of the deal, commercial property finance is a separate funding question again.

The working-capital trap

Buyers fixate on the price and forget that a business has to be funded from the day they take the keys. The first 90 days can include a stock top-up, wages and super before the first full week of takings, rent and outgoings, a BAS cycle, and a bill or two the previous owner left behind.

An example, not a real case: take a buyer who puts every dollar into the purchase price and a deposit, then finds the stock is thin, a supplier wants cash on delivery from the new owner, and payroll lands before the takings do. The business is sound. The buyer simply has no cushion. This is the most common way a good purchase turns into a stressful first quarter.

• Ask what is included. business.gov.au asks whether stock on hand is part of the sale and what debts or liabilities sit against the assets.
• Budget stock, wages and rent for 90 days before you decide how much to put into the price.
• Line up a buffer. A business line of credit or a cash-flow loan can sit behind the purchase, and cash-flow lending needs 6 months or more of trading, so it suits buyers with an existing business.

For the stock side, see how to buy stock cheaply with fast finance, and for the wages side payroll and wages funding.

When to walk away, and when not to put your home on the line

Moving fast is not the same as moving blindly. A deposit loan secured on your home is a sensible tool only when the purchase is protected by conditions and you can see how the loan gets repaid. Walk away, or at least slow down, if:

• The vendor will not show records, will not introduce you to the landlord, or resists an independent accountant.
• You are pressed to waive due diligence or finance conditions to “secure” the deal.
• The deposit is not refundable even if the lease or licences fall through.
• The price only works on the vendor’s best-case takings. Business Victoria also lists pending litigation, customer complaints and sudden price cuts before sale as seller red flags.
• You have no realistic route to settlement finance. If the bank has not given you any indication, a second mortgage on your home is a bridge to nowhere.
• Repaying the loan would depend on the business working perfectly from day one.

A simple test: if the deal fell over tomorrow and the deposit came back, could you repay the loan from it? If the answer is yes, the structure is safe. If the answer is no, you are risking your home on the vendor’s conditions, and that should be a deliberate choice, not a deadline reflex.

Sometimes the better option is to lose the deal. There are always more businesses than good opportunities, and a cheaper business bought with a cushion beats a perfect one bought on a knife edge.

See how fast your deposit could be ready

If you have found the business and the numbers stack up, the next step is knowing exactly how much your property could release and how quickly. The 60-second eligibility check makes no credit enquiry and costs nothing. Find out what your equity could fund before the next buyer rings the broker, or call 1300 863 711 and tell us the contract timetable.

Frequently asked questions