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?
