If you want to succeed in business
Getting the numbers under control for your business is critical.
You need to arrange finance to buy the business, and then you need to keep track of the money along the way.
Finance for the purchase of the business will usually come from a combination of:
  1. Funds from your own resources
  2. Funds from your fellow business partners or investors, if there are any, and
  3. Funds from a lender, usually a bank.
Equity and Debt
If you are using a company to buy the business, your own funds will either be:
  • a loan from you to the company, or
  • funds you introduce into the company as “equity”.
The fundamental difference is that if you loan the funds to the company, the company owes it back to you. If you put funds in as equity though, its your share of the company, and if the company becomes insolvent you don’t get it back.
Funds from investors
Investors will usually provide money as equity so that they get a shareholding in the company. This will enable them to receive dividends from the company, and will allow them to have a say in the running of the company, for decisions that require shareholder approval anyway.
Borrowing from the Bank
If you borrow from a bank it will be a loan. The bank will not want shares in your company. But it will want security for the money it is lending the company, and it will charge interest. The security may be a charge over the “assets and undertaking” of the business.
In other words, in the event that you default under your loan, the bank can take your plant and equipment and sell it; and the bank will be entitled to receive your income and chase your debtors for payment.
Bank Guarantee
Not only that, but the bank will almost certainly want a personal guarantee from you. This exposes all your own assets to the bank if the company becomes insolvent.
The bank will generally want to find a way to get a mortgage over property. That is the best security as far as banks are concerned. Often the company won’t own property because it is a business. All it will have is some plant and equipment, and cash in, cash out. But if you are providing a guarantee and you own property, then the bank will want you to support that guarantee by giving them a mortgage over the property.
Obviously all of this is negotiable. But remember, you are the one wanting the money, and you will find that the bank will set the rules. If you can provide the security they want, they’ll loan you the money. If you don’t, they won’t. Its about that simple.
At Queenstown Law we have extensive experience regarding finance for the purchase of businesses. We know what sort of security you should be providing and how to structure your finance. We can advise you how best to set up your purchasing entity, and which type of entity to set up, and why.
Once you’ve got your business (in fact before you buy it), there are a whole lot more questions you need to run through your mind about finances.
Don’t be a businessperson who is an expert at making widgets but who doesn’t want to know about the numbers.
Don’t give me “oh, I just leave that to the accountant”. That sort of thinking is not good enough and will find you out. Get interested in the numbers!
Here is a very good starting point:
That is a resource you should refer back to from time to time until getting your head well and truly around the numbers becomes ingrained.
In the words of Jerry Maguire: “Help me help you”.
Email us on anytime for advice on this.