Most financing options assume that the buyer will have a down payment toward the purchase of their business. Depending on the situation, that down payment may be in the range of 10-30% of the purchase price. The balance is then financed, perhaps by a bank, or sometimes the seller.
Use the following scenario and answer the questions that follow:
Assume that you are planning to purchase a business in 10 years. You anticipate the purchase price will be $500,000 and you will need a 20% down payment.
At a 6% rate of return, how much do you need to save each year to accumulate the down payment?
If you need 25%, and the rate of return is 5%, how much do you need to save each year?
For the percentage of the price you need to borrow, and considering the current phase of the business cycle, would you prefer a fixed or variable rate loan, assuming that you will have a 10 year payoff? Why?
Now assume that you will own the business for 15 years, and that it will grow at an annualized rate of 12%. Using the same $500,000 purchase price, what will be your selling price at the end of 10 years?