How Much to Deposit to Buy a Business
The exact deposit amount to buy a business needed will depend on the business as well as the lender providing the loan for you to purchase the business.3 min read
Wondering how much to deposit to buy a business? The exact amount needed will depend on the business as well as the lender providing the loan for you to purchase the business.
Sources of Financing
One of the most common ways to finance the purchase of a business is called debt financing. Debt financing means you will be going into debt by borrowing money from an external source, such as a bank. This arrangement involves an agreement to pay back the principal amount of the loan as well as a percentage of interest. In some cases, you can go through private debt financing, such as borrowing money from family members or friends.
Some banks aren't as willing to lend money to small business owners on a long-term basis, making it harder to get a small business loan. The Small Business Administration now stands behind certain loans offered to small businesses to lower the risk and encourage banks to lend to these business owners.
An alternative to taking out a loan to purchase a business is agreeing to sell shares of stock in the business to investors. This is called equity financing and may involve selling a portion of the business to a venture capitalist or other outside source who is interested in investing. This option differs from taking out a loan in that you aren't responsible for paying the money back but will give up a portion of ownership and potentially losing some control of running the business.
Other Sources of Financing
If you don't need as much money, you may consider borrowing from family members or friends. Another option is working with angel investors. These are people who provide capital for a new business startup in exchange for ownership equity or convertible debt.
Seller Financing Is a Possibility
The assets owned by a business can be very important, so another possibility is to obtain financing from the individual or business selling the organization. In this situation, the seller is usually willing to wait several years to receive payment in full. This option does have drawbacks and benefits for all involved parties.
One of the drawbacks can be a higher purchase price. Most sellers will require between 5 and 25 percent of the agreed-upon price in exchange for this financial arrangement. These rates tend to be much higher than what would be paid to a bank on a more standard loan. Not every seller can wait multiple years to receive payment.
A benefit of this type of financing is increased security from the seller that they have an incentive for the business to succeed, grow, and perform well. Buyers may also have additional opportunities for negotiation when working directly with the seller for a loan, which they wouldn't have when borrowing from an uninvolved party, such as a bank. Some of these opportunities might include:
- Offering equity to the seller to recoup a portion of the sale price through the company's profitability
- Stretching out the payments for a longer period of a time to keep the monthly amount lower
Deposits With Purchase Agreements: Rules and Guidelines
If you plan to pay a portion of the purchase price as a deposit, you'll need to make sure to have a contract in place that has clearly defined consideration for all involved parties. A contract without consideration isn't legally enforceable. Even when the parties negotiate, agree on a purchase price and terms and conditions, and sign a contract, it will be difficult to enforce without a deposit, which serves as consideration.
In this example, the other involved party may change their mind about selling a business to you or find a buyer who's willing to pay a higher price. That party can choose to move on to the someone else to purchase the business, and your original agreement won't be enforceable without a consideration.
Even offering a single dollar as a deposit can serve as consideration and make the contract more enforceable, but a seller may see this type of offer and believe that you're not serious as a buyer. Offering 5 to 10 percent of the purchase price as a deposit makes you seem more trustworthy and serious. The amount should likely be at least a few thousand dollars.
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