Deciding the Payment Structure of Business Purchase

A very important point to be taken into consideration while buying a business is structure of payment. It is not as easy as to take out your credit card from your pocket and pay. After all, you are buying a business and not a piece of furniture or a packet of semolina. Luckily, most sellers don’t expect buyers to pay the entire amount as a lump sum. But you should consider both the options – lump sum payment and installment payment.

Lump Sum Payment

If you have collected huge cash, lump sum payment is possible for you. But is it practical? Yes, if you are getting a good discount upon paying the entire amount at a stroke. You have to also pay the entire amount upfront when the seller is insisting on it.

If you are undergoing such a situation, you should think upon a way to generate that much cash. It is easy to do it if you already own a business and buying another one as an expansion. Taking a loan like business loan, loan from a friend or someone similar is also another option. Or you can also invest your retirement payment for purchasing the business.

Installment Payment

This is the standard form of payment when a person buys a business. Here a certain percentage of the purchase price, mostly 20-25% is made as down payment and a promissory note about paying the balance cost at installment basis for particular number of years is signed.

There is one more way of down payment adopted by some buyers and sellers. Here some form of services or an asset is given to the seller as a part of or the entire amount of the down payment. This can be a service truck, a skill of home decoration, a condo, a car etc. The seller too is happy to receive it if the object concerned is not bound by a debt.

The clauses in the promissory note should be determined carefully by both the parties. Plenty of things are to be agreed upon such as the amount to pay, its interest rate and schedule of payment, etc. There are clauses also regarding what can happen if you fail to pay the amount on specific dates and the final date.

It is recommended not to pay the whole amount you have as down payment and keep some of it aside in those needy days of your initial business months. So, it’s better to keep the down payment percentage to 10% rather than 35%.
Don’t forget to include a clause about previous pending bills which the seller should agree to pay.

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