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Down Payment

Tags: deal structures

Comments & Replies: 2     Views:     Post ID:     Comments About This Glossary Term

Contributor: Business Broker, Northern California
A serious buyer will bring a serious down payment so a serous buyer takes their offer seriously. In addition to their down payment they should bring a resume and if they want the seller to carry some sort of finance, a copy of their credit report and credit score.



I always suggest to a serious buyer that before they start looking to buy a business that they check their credit report as often there are errors. There is nothing worse than a buyer finding a wonderful business they wish to buy and then be unable to close the deal because their credit report has an error that makes a seller or lender feel uncomfortable closing a deal.

Like the cash used by a buyer as part of the payment when acquiring a house'with the balance of the purchase price comprised of promissory notes, an individual who is purchasing a business will meet the negotiated price with his or her cash down payment plus money acquired through a loan from the seller and/or a financial institution.



Size of the down payment - which often is expressed as a percentage of the total price, depends entirely on the negotiated agreement of the buyer and seller, as there is no rule dictating an appropriate amount. However, a common figure in real estate transactions is twenty percent of the price. Down payments on business purchases often are higher - a third or more of the final price - because a business buy is usually is considered a riskier investment and any lender is likely to want as much down payment as possible for a deal it will help fund. Lenders feel the larger the buyer's financial stake in an investment - that is the more money put into the deal with the buyer's down payment, the less likely the individual will be to fail at the business or to fail to make payments on any loans needed to complete the purchase.



Financial institutions making business purchase loans often require that the buyer's down payment equals forty or fifty percent of the price before the loan application will be considered. And sellers who are willing to take a promissory note for part of the price, and thereby become a lender for the deal, usually want the buyer to make a commitment of at least thirty percent of the price with his or her cash as the down payment.



The mechanics of the down payment usually take place in the business escrow which concludes the transaction and legally transfers the business to the buyer.



The buyer ordinarily has put cash into the escrow in the form of the earnest money made with the offer. During the escrow procedure, the buyer will give the escrow holder a check for the amount required to add to the earnest money deposit in order to reach the sum required for down payment. That would mean, for example, a $45,000 check delivered at closing if the earnest money deposit was $5,000 and the down payment called for in the sales contract is $50,000.



It is not uncommon for a buyer to take out two loans to purchase a business. In the typical scenario, the seller will carry back part of the purchase price in the form of a promissory note from the buyer, and the rest of the funds needed to complete the down payment - if the total down payment is not coming directly from the buyer's funds, will be supplied by a financial institution that has agreed to provide business purchase financing for the transaction.


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