Understanding Your Finance Condition
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Written by
Sarah Stoddart
- and posted in Dental, Medical, Pharmacy, Physio, Small Business
Securing finance is a common and a critical step in the process of purchasing a business. Therefore, it is essential that before satisfying the finance condition, purchasers carefully review your finance documents and consider how they tie into your obligations under the purchase contract.
Key considerations include:
1. Consider your bank’s requirements
A financier’s requirements for granting finance approval vary for each purchaser and each transaction. For example, a financier may require a valuation or other documentation, such as lease documents, before it will grant approval and provide funds for the purchase.
Purchasers should engage with their financier early to identify any specific requirements and if necessary, ensure the requirements are factored into the contract. The requirements are also relevant to determining the time period required for finance approval and ultimately, when the purchase can be completed.
2. Understand the condition
It is important purchasers understand the finance condition in the contract including their rights and obligations, and the time period available to obtain finance. Having a clear and realistic timeframe stipulated in the contract avoids the need to request an extension after the contract is signed.
3. Understand and confirm the terms of lending
Before satisfying the finance condition, purchasers should confirm if finance has been formally approved and what, if any, conditions attach to the approval. It is common for financiers to require additional documentation or ongoing annual requirements as part of finance approval.
If the finance approval is conditional, purchasers must understand the conditions and the steps required to meet them. Importantly, purchasers should also ensure they understand and are comfortable with the terms of the loan, such as the proposed interest rate, security, and repayment terms, before deciding whether to give notice that the finance condition is satisfied.
Waiving or satisfying the finance condition without formal approval from your financier can be risky. Once finance approval is waived or satisfied, you must have sufficient funds to pay the purchase price at settlement. If there are conditions which cannot be met prior to settlement, it is possible settlement won’t be achieved. If you are unable to settle, the seller may have rights to terminate the contract, retain your deposit, and take legal action.
4. Be aware of any linked contracts
If you are purchasing more than one business at the same time, it is important to be aware that failing to satisfy the finance condition for one contract may impact the other. For example, termination of one contract could result in the termination of the other. Ensure you are aware of the terms of your contract before you take action under the finance condition.
5. Be compliant
Diarise the due date for satisfying the finance condition and ensure you give instructions to the acting solicitor before the due date.
Failing to satisfy the finance condition by the due date could result in the seller having the right to terminate the contract.
Engaging financiers and lawyers early, and don’t overlook key details or risks. Thorough preparation and clear communication with all parties involved are key to a successful business purchase.
This article is intended to be for general information only. It does not constitute legal advice nor does it establish a relationship of client and lawyer. Specific circumstances or changes in law may vary the accuracy or applicability of the information published. We recommend seeking specific legal advice particular to your circumstances before taking any action, or refraining from taking any action, on any issue dealt with in this article.