Financing the Purchase
If you don't have the money already in the bank to buy the business, financing the purchase may be easier than financing a start-up. If you've done all of your research well, you'll be offering your lending institution an established business with a proven track record of revenues and profits.
There are some other, more creative ways to finance the business purchase. These often involve the existing owner holding the note with an agreement to repay it over time depending on how the business performs — or there could be a sliding scale of ownership over time, with you gaining more ownership the more you put toward the sale price.
However you choose to finance the purchase, you'll need to ensure that the business is able to carry the debt. For example, a small home-based service business might be for sale for $50,000. You need to finance $40,000 of that figure. For the past three years, the owner has netted $30,000 after expenses and before taxes. The bank is willing to lend you the $40,000 on a five-year note at 10 percent interest. That means that your monthly loan payments will be around $850 or $10,200 annually. This leaves you with a net of just under $20,000 before taxes.
Think about it: If you have personal expenses (including taxes) that total more than $20,000, and you don't believe you can increase the revenues of the business to the point where they'll cover those expenses, you're looking at a loss. The business doesn't have high enough revenues to service that debt, so you shouldn't take on the loan.
It should go without saying that although financing a business purchase sounds like a good solution, your lawyer and your accountant should have the last word on whether it's a good idea in your specific situation.
