Expected Read Time: 6 min read
Quick Summary / TL;DR
- The Valuation Gap: Sellers value businesses based on SDE (Seller’s Discretionary Earnings), while banks lend based on "Normalized EBITDA."
- Add-Backs Matter: Banks are increasingly skeptical of aggressive personal expense add-backs; clean documentation is non-negotiable.
- Property is King: If you lack a cash deposit for a buyout, using existing residential or commercial property as security is often the only way to get the deal across the line.
- Strategy First: Don’t start with a loan application. Start with a Strategic Funding Plan to benchmark the deal's viability within 7 days.
Buying an existing business is often described as the "shortcut" to entrepreneurial success. You skip the "garage startup" phase and step straight into cash flow, staff, and established systems.
However, there is a massive disconnect between what a business broker tells you a business is worth and what a bank is actually willing to lend you.
At Baseline Finance, we see this gap every day. In practice, many advisers in the brokerage space focus on the sale, not the funding. To navigate a successful buyout, you need to understand the practical mechanics of acquisition finance.
The Secret Multiplier: SDE vs. EBITDA
When you look at a business information memorandum (IM), you’ll likely see a figure called SDE: Seller’s Discretionary Earnings. This is the total "benefit" the current owner gets, including their salary, their partner's car, and that random trip to "research" the market in Noosa.
Brokers love SDE because it makes the profit look huge. Banks, however, don't care about SDE.
Lenders look at Normalized EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). They take that big SDE number and immediately subtract a "Market Replacement Wage."
If the business requires a full-time manager and you plan to be that person, the bank will deduct what it would cost to hire someone else to do your job (e.g., $120,000 + super). Suddenly, your "profitable" acquisition looks much tighter on paper.
Why "Normalization" is Your Best Friend (and Worst Enemy)
Normalization is the process of stripping away the "noise" of the previous owner to see how the business will perform under your leadership. This involves "add-backs": expenses the business paid for that you won't have to.
Common Add-Backs include:
- One-off legal fees or equipment repairs.
- The owner’s personal vehicle or phone.
- Excessive director salaries.
The key point: In 2026, Australian banks are more conservative than ever. If you can’t prove an add-back with an invoice or a clear paper trail, the bank will likely ignore it. This lowers your "bankable" profit and, consequently, your borrowing power.
Why Banks are Hesitant (and How to Pivot)
Banks view business loans for acquisitions as high-risk. Unlike a home loan, if the business fails, the "security" (the business itself) often evaporates.
Most major lenders in Australia will only fund 50% to 70% of the purchase price against the business value alone. This leaves a significant "funding gap" that you must fill.
The "No Deposit" Solution: Property as Security
A common hurdle for ambitious entrepreneurs is the lack of a 30-50% cash deposit. Here is an important strategic point: You don't always need cash.
If you have equity in a residential home or another commercial property, you can use that as secondary security. By securing the loan against bricks and mortar, you not only increase your chances of approval but often secure a much lower interest rate and longer repayment terms.
Debt vs. Equity: Finding the Balance
Funding a buyout isn't just about getting a loan; it’s about the "capital stack."
- Senior Debt: This is your primary bank loan. It’s the cheapest form of capital but comes with the most strings attached.
- Equity: Your own cash or investment from partners.
- Vendor Finance: This can be a useful strategic tool. The seller "loans" you part of the purchase price, which you pay back over time from the business profits. This shows the bank that the seller is confident in the business's future.
"A deal that relies 100% on bank debt is rarely a deal the bank will actually fund. You need skin in the game, or a seller who is willing to back their own horse."
The Strategic Funding Plan: Your 7-Day Roadmap
Before you sign a Heads of Agreement or pay for expensive due diligence, you need to know if the deal is "bankable."
At Baseline Finance, we provide a Strategic Funding Plan. Within 7 days, we benchmark your potential deal against current lender appetites. We look at the serviceability, the security requirements, and the "normalized" reality of the numbers.
This roadmap prevents you from wasting months on a deal that was never going to get funded in the first place.
Terms to Know: The Acquisition Glossary
- Amortisation: The process of paying off the loan principal over time. Most acquisition loans have a 5 to 7-year term.
- DSCR (Debt Service Coverage Ratio): A metric banks use to see if your profit can cover your loan repayments. They usually want to see at least 1.5x coverage.
- Goodwill: The portion of the purchase price that exceeds the value of the physical assets (the "blue sky").
- LVR (Loan to Value Ratio): The amount you are borrowing compared to the value of the assets you are providing as security.
Final Thoughts
Business acquisition is a game of transparency. If you try to hide the "warts" of a deal or use aggressive add-backs to inflate profit, the bank's credit department will find them.
The most successful buyouts we facilitate at Baseline Finance are those where the buyer has a clear understanding of their working capital needs and a realistic view of their borrowing capacity.
Ready to see if your dream acquisition is bankable?
Contact us on 08 6108 3925 or email commercial@baselinefin.com.au
