Michael Beddoes | Partner

The MBA Partnership

Even before, but especially after the recent Financial Services Royal Commission, quite a few of our management rights clients have encountered a much tougher stance from financiers in relation to the funding of new purchases as well as the refinancing of existing businesses.

Previous to the Commission, it was more common for management rights loans to be 70% of the value of the business and the manager’s residence, and for an interest only loan period of 3 years (assuming the management rights agreement has a 25 year term).

More recently, depending on the borrower’s financial position, financiers are moving more towards lending up to 65% of the total value of the business and manager’s residence, and in some cases, seeking a commitment for principal and interest on a percentage of the total amount borrowed. However, in cases where the purchaser is inexperienced, some financiers may grant an interest only period of 1 year and review the performance of the business after that time to see if they are prepared to extend the interest only period or convert part of the borrowing to principal and interest.

When refinancing existing loans, financiers are looking at the performance of the business over the initial period and requesting a business valuation at the end of the first loan term. If the business is performing well and the new valuation holds up to the original purchase price, financiers may still require a principal and interest loan commitment at this refinancing time.

If however, the new valuation falls short when compared with the original purchase price, financiers may request some upfront capital repayment and generally some principal and interest repayment on part of the overall borrowing in the future.

In our experience, some clients underestimate the costs involved with obtaining initial finance or refinancing of existing loans. There may be a requirement for biannual accountant-prepared financial statements as well as evidence from the ATO that your taxation obligations are up to date.

We highly recommend investigating what is involved well before endeavouring to apply for or a refinance a loan as this can be a complicated and timely process. If you wish to discuss any concerns or issues you are trying to overcome or review you present situation, get in touch.