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Business Purchase - Structuring Payments

When considering buying a business, you've probably thought about how are you going to pay for it? Given the probable price tag, this isn't a situation where pulling out your credit card will likely help. Generally, the seller doesn't usually expect to collect the entire purchase price up front.

Making a Lump Sum Purchase

You can pay the whole amount at closing if you have the cash, however, is there good reasons to do this? One possibility is that the business is very attractive to you, but the seller insists on full payment. Another possibility is that the seller offers a worthwhile discount on the sale in exchange for full payment.

Either way, you'll have to figure out how to come up with the cash.

Making an Installment Purchase

The most common form of purchasing a business is to make structured payments with a down payment of 20% or 25% and then sign a promissory note agreeing to pay the balance to the seller over a number of years, in regular installments.

Down payments are usually made in cash, however, some buyers have been able substitute an asset or services for all or part of the down payment. As an example, you own a motorhome, a vacation condo in Hawaii, etc. As long as these items are not encumbered by debt, the seller might be willing to accept any of these as part of the down payment. The other possibility is if you have specialty skills, such as home improvement skills, you might be able to trade these for the downpayment.

You and the seller will specify the terms of the promissory note in your sales agreement As for the terms of the promissory note, . Prior to signing the promissory note, you will have to agree upon a number of variables, such as the down payment, the interest rate, the payment schedule and the final payment date. Also you'll want to spell out what happens if you fail to make payments, etc.

Be careful as the buyer that you do not to agree to an overly ambitious payment schedule, excessively high interest rate (check your state's usury law to make sure you're not paying more than allowed), or any other terms that will make the plan impossible to work. For calculating the monthly payments based on the loan amount, loan term, and interest rate, click here to use this online amortization calculator http://www.amortization-calc.com/.

Generally the amount of time to pay off the balance of the sales price by making equal payments will be over the course of two or three years perhaps a bit longer. Shorter payoff period should be avoided unless it's clear that your new business will produce sufficient profits to allow this.

Obviously it's usually better to make a relatively low down payment, around 10% rather than, 30%. This will help keep some cash in reserve for unexpected expenses in the early months of ownership (such as old bills that the seller neglected to mention) or to help ride out slow periods.

What about old bills? To cover yourself, your purchase agreement should include a clause that says the seller has agreed to pay them. If the seller doesn't follow through, you can pay them yourself and deduct the amounts from your upcoming installment payments.

Keep in mind that there is always a possibility that things will not go as planned. For this reason, your agreement will allow the seller a way to collect payments for the business by containing terms that allow the seller to either foreclose upon the business or collect from your personal assets.

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