Payment Terms: Down Payment

April 13, 2006

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Of course, the best kind of deal is where you receive the entire purchase price for your business, in cash, at the time of the closing. With this kind of deal, you could walk away from the business, free and clear. Many owners would gladly reduce their price significantly if the buyer would pay all cash.

However, it's a rare purchaser who can come up with enough money to satisfy the owner. This is occasionally possible where the buyer is a large corporation or where the business itself is cash-rich enough to be partially self-financing (for example, the business has excess working capital, a buildup of investments, and/or receivables or inventory that can be used to redeem the stock or as collateral for an asset-based loan).

How big of a down payment is your absolute minimum? You'll definitely want to be able to cover your tax bill, so you need to have an estimate of what that will be. Be sure to include any state and local taxes, such as sales tax, stock transfer tax, or real estate stamp tax, that will be due on the transaction. You will also need to net enough cash after taxes to pay off any business loans that the buyer is not assuming. Finally, don't forget to include other transaction costs that must be paid at the time of the closing, such as broker's commissions, appraisal's fees, attorney and accountant fees, etc.

There's also the consideration that most commercial lenders will require a down payment of at least 25 to 30 percent, to be sure that the buyer isn't going to walk away if the going gets tough. This is a good requirement for you to adopt. The buyer should have a significant amount of his or her own money invested in the company.