Quick answer: Potentially. Acquisition finance is often assessed using verified earnings of the target business, but the lender will normalise those earnings and test whether they remain sufficient after buyer wages, existing debt, proposed acquisition debt and any required buffers.
This page is where an acquisition either starts to look financeable or falls apart. The seller’s “profit” is not automatically the lender’s servicing number.
Have the target financials? Request a business-acquisition assessment and test the serviceability before negotiating the final funding mix.
Worked example: headline profit is not the same as debt-service cash flow
Illustrative only.
| Item | Illustration |
|---|---|
| Vendor-stated annual profit | $300,000 |
| Add back one genuine one-off cost | +$20,000 |
| Replace under-market owner wage | -$80,000 |
| Allow for maintenance / recurring costs not in headline figure | -$20,000 |
| Normalised cash earnings for assessment | $220,000 |
| Next test | Existing + proposed debt repayments and lender buffer |
Normalise before you finance
Start from financial statements and tax returns, then identify items that genuinely change under the buyer. Add-backs need evidence and a reason they will not recur. Expenses that the outgoing owner did not fully recognise may need to be put back in.
Buyer wages matter
If the buyer must work in the business, the assessment should allow a realistic wage or drawings requirement rather than assuming all earnings are available for debt. This is particularly important where the vendor worked long hours for a low wage.
Debt already inside the business matters too
Equipment finance, leases, ATO liabilities and other commitments can remain after settlement or need to be refinanced. The lender will want a clear opening balance sheet and transaction structure.
What makes target earnings more reliable
Several years of consistent financials.
Stable gross margins and customer mix.
Low dependence on one owner, customer or contract.
A credible transition plan.
Evidence that recent trading is consistent with the historical numbers.
What to do next
If you have the last two to three years of financials and the asking price, send the transaction for an initial finance assessment.
Frequently asked questions
Can a lender use the business I am buying to service the loan?
Potentially. The target’s verified and normalised earnings can be relevant, subject to lender policy and the transaction structure.
Will the lender accept every vendor add-back?
No. Add-backs normally need to be identifiable, supportable and unlikely to recur under the buyer.
Do I need to include my own wage?
If you need income from the business, it should be reflected realistically in the assessment.
What if the business has grown sharply this year?
Recent management accounts and bank activity may help explain the change, but the lender decides how much weight to place on recent versus historical performance.
Sources and verification
Related GPS Finance guides
- How much deposit to buy a business?
- What financials will a lender trust?
- Buying without property security
General information only. Business and commercial lending policy, pricing, security, guarantees, documentation and approval vary by lender and transaction. Examples are illustrative and are not credit, legal, tax or accounting advice.
Need help matching this to a business-finance option?
GPS Finance can review the funding purpose, conduct, documents and lender fit before you make a formal enquiry.
