Buying a business - Finance Options

[gifs]

I am considering buying an existing business, more specifically a nursery school.

The transaction will include the property on which the school is located. Let's say for argument's sake, the asking price of the business is R2.5 million, of which R1.5 million is the value of the property.

What options do I have to finance the purchase of this business without having to use too much of my own cash? Do the banks offer such finance? Any other institutions? What sort of deposit would I typically need to put down? I realise this is highly dependent on credit scores etc.

If anyone has any experience in this type of thing, your input would be appreciated.

 

[playa4life]

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[IziWhatNow]

I can't answer your question, but remember that when buying a business zoned property you have to pay VAT on top of the purchase price, an additional R350k in your example

 

[AchmatK]

I can't answer your question, but remember that when buying a business zoned property you have to pay VAT on top of the purchase price, an additional R350k in your example

Incorrect. VAT is only applicable if the seller is a VAT vendor irrespective if the seller is a business or individual.

Only VAT vendors can add VAT.

 

[Thor]

I can't answer your question, but remember that when buying a business zoned property you have to pay VAT on top of the purchase price, an additional R350k in your example

Incorrect. VAT is only applicable if the seller is a VAT vendor irrespective if the seller is a business or individual.

Only VAT vendors can add VAT.

Not sure if it is vat, but there is a "tax" or something that you pay if it is a business zoned property.

 

[Tomtomtom]

I have no experience buying nursery schools, but if I was going to, I'd employ a lawyer/accountant to help with due diligence.

At R2.5 million, it's not unreasonable to expect to pay R100+k in professional fees.

A lawyer could draft a proper sale agreement. I'd also want to be clear on any liens / encumbrances on the business, and clear on its financials.

That would in turn massively help with raising finance. Put another way, get it so that if it was someone else raising finance, you'd loan to them.

The other option is equity. But then you need a partner you trust. Generally, they don't exist.

 

[SauRoNZA]

Pretty damn sure you are going to need a business plan to convince the bank that you can show a profit and pay back the money.

 

[pwstraton]

I can't answer your question, but remember that when buying a business zoned property you have to pay VAT on top of the purchase price, an additional R350k in your example

He is buying the business. If it is purchased as a going concern it is eligible to be zero rated subject to certain requirements.

OP: Would approach the commercial division of a bank and ask them what they would need and who they typically provide loans to.

Otherwise approaching someone like Business Partners (who provide financing for small businesses) may be an option - if anything they would be able to help guide you in the right direction.

Can second the advice on the lawyer/accountant - probably would need a combination of the two, however Business Partners or any other financier would probably have this help available.

 

[saturnz]

you can get a (commercial or residential) bond for the property and purchase the business seperately, so you only need to find out where to get the extra bar minus any finance you already have available

 

[Inviter]

I don't know much about financing a school but bear in mind that a school would probably have to be recognized. Make sure all that is on order. Also make sure that all permits, indemnity forms ect are im order.

 

[Inviter]

*in

 

[gifs]

Thanks for the feedback so far guys. Definitely a couple of things I haven't thought of yet.

I expect that the property is registered in the seller's personal name, so it would probably a separate transaction with no VAT or anything like that. Many nursery schools start off at someone's house and then as it starts growing the owner moves out and converts the entire house into a school.

 

[Y'all Qaeda]

Check their status with the Department of Education as well. As schools like this grow, they tend to skate on the unapproved side of number of parkings/toilets etc..

 

[watkinse.6]

Hi
We are thinking of doing something similar. What did you eventually do?

 

[Greg C]

OP: In terms of buying the business theres a few foundation questions that need to be asked and answered.

First: Specifically in your circumstance with the nursery school. There are in fact two transactions happening here but are essentially linked. The property in question is one part and the business is a second. The property portion, the bank would be happy to finance this but based on the fact that is a special use or commercial use property in essence unless you will be living there as your primary residence. I bring this up as it affect financing. If it is done as special use or CPF, banks will generally only loan you a max of between 60-70% of LTV depending on valuations

You will need to put in the difference. The same goes for the business side of the transaction.
You can as mentioned above look at business partners etc who can assist but pricing is expensive and not quite the same as a corporate loan

Unless you yourself have a history or can showcase an ability to actually run a nursery school, ie youre a teacher or a principle or have an education background or history of running something similar, your business case to a normal corporate bank is already on the back foot if not impossible.

Whilst my post above and details isnt exactly that helpful in a way forward it does eliminate going to formal banks with the hopes they will fund you. In all liklihood you will need to find a partner with equity to join with you or a venture capital/funding company that will assist for a price

My last few cents: Most nursery schools historically are run as a sole prop. Someone starts a nursery school as a sole prop as they have the property and just expanded the property. So ensure that the regulations are there, license to practice, number of kids per teacher, valid occupational health and safety etc. There is quite a bit for the nursery school and the number of learners is very relevant.

The property enables the business but isnt the business itself. So becareful with lumping them together. They are seperate and need to be treated as seperate in the way you do the business.

Good luck with the financing, but you are experiencing the very issue with SME funding in SA, the normal routes through banks tend to shy away from these types of transactions which is where SA's dire need for alternative funding comes