Commercial property

Is it all up-front? Is it performance based (Earn-Out). Effectively is something in place to ensure that the business continues to perform how it previously has.

Some businesses sales are set up for a part payment after 6 / 12 months based on the performance of the business since acquisition. This makes sure you have some protection against any future curve balls.

Check with the vendor if a business valuation has been done or is it based on an assumed multiplier of the EBITDA.

What on earth is the EBITDA?

It stands for Earnings Before Interest, Tax, Depreciation and Amortisation. And it’s a measure of a company’s operating performance. Basically, it’s a way to evaluate the performance of a company without having to factor in financing or accounting decisions or the tax environment. It can be useful for comparing the profitability between companies.

It’s important to know up front what the handover plans are. Is the existing owner staying (if so, in what capacity?) or selling up and leaving you on your own straight away? Both scenarios have their pro’s and con’s depending on the business.

If a Business Owner is leaving the business right away or after 12 months how are those relationships and expertise they have built protected? Have you put a Restraint of Trade in place?

Effectively you don’t want the previous owner setting up shop around the corner and regaining their previous customers from your new business.

It’s important to have a clear plan. There are a few questions you need to ask yourself:

• Once you buy the business, will you be stopping your existing employment to focus on your new venture full time, or is the business an additional source of income?
• What experience do you have in the industry? Do you have enough working knowledge or are you making a career change as well as an employment change?
• What experience do you have in running a business? Maybe you’re a newbie or maybe you’ve been running small businesses since your first lemonade stand outside your parents’ place.

In order to apply for a small business loan, banks will need to know the above information and then some. Full historical financials would be required along with forecasts and banks may also require a business plan to help illustrate your future expectations of the business and any potential risks.

It’s a lot to take in, but with the team on your side we can help you work out the EBISU from the EBITDA.

First up, a loan on a commercial property will be across a shorter term. Usually between 10 – 15 years paying principle and interest. You will also require a deposit of about 30 – 35%. You will also be paying commercial interest rates. The way these are calculated is using a base rate plus a margin. How much margin is determined by the level of risk in the deal.

As mentioned, to determine the final interest rate applicable to the loan, the bank will assess how risky the deal is. The lower the risk, the lower the rate.

To do this, banks will look at the strength of the existing and/or future lease. Things like a well known, long term reliable tenant will go a long way to de-risking a deal. If the lease is reliant on a small business it won’t be viewed as favourably. Basically, the stronger the lease the more the bank is able to de-risk which drives down your interest rate.

Often with commercial property, if you’re able to go slightly bigger in order to get a stronger tenant then you’ll be better off in the long run. Long term stability is hugely important in commercial property as the value is determined by the rental income it generates.

Given the events of recent years, commercial properties may need to have a seismic evaluation done. This could start off with an IEP report (Initial Evaluation Procedure) and may end up with a DEE report (Detailed Engineering Evaluation) which will outline what needs to be done and how much it will cost. The ideal number with regards to earthquake strength is 66% but the higher the score the better.