Commercial [kuh-mur-shuh l] Making or intended to make a profit. That’s exactly what we’ll try and help you to do. Make a profit from your commercial property. Whether you’re a newbie or a seasoned entrepreneur, have a look at the information and resources below to help get you on your way.
Buying a small business
Owning a small business is certainly the dream of many. Imagine the freedom. The control. The stress (well maybe not that part). Regardless it’s a great dream to work towards. But before you take the leap, there are a lot of factors to consider, especially if you’ll be looking to get finance to support your venture. Here are just a few of them.
What’s the purchase price of the business based on?
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.
Is the existing owner going to stay in the business?
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.
What about you?
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.
From the bank’s point of view, having a house as security de-risks the lending. It gives them a fall back position if something should go wrong.
From your point of view, secured lending will have a lower interest rate, because of the lower risk.
Remember, interest on business lending is tax deductible which will increase savings within the business.
Giving up your house as security can be a daunting prospect. But our team can help you every step of the way to make sure you’re fully informed and making the right decisions.
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.
How risky is 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.
How safe is the building?
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.
Whether you’re simply testing the waters or you’re ready to take the plunge into the world of commercial property, make sure you get in touch with the team first.