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© Copyright 2002-2003. All rights reserved.
Page 18
How To Investigate Any Business Opportunity
It is rare for a privately-held business to change hands for an all-cash price. Almost all transactions are
structured as installment contracts which provide for the seller to receive some cash, but for the bulk of
the purchase price to be owner financed. For smaller privately held businesses, the down payment often
ranges from 10% to 40% of the selling price and the buyer executes a promissory note (secured by the
assets of the business only) for the balance. Such notes are typically for a period of 3-15 years at an in-
terest rate that varies with the prime rate. 
Leveraged Buyouts
Just as in an installment sale, a leveraged buyout uses the assets of the business to collateralize a loan
to buy the business. The difference is that the buyer in a leveraged buyout typically invests little or no
money, and the loan is obtained from a lending institution.
This type of purchase is best suited to asset rich businesses. A business that lacks the assets needed
for a completely leveraged buyout may be able to put together a partially leveraged buyout. In this struc-
ture, the seller finances part of the transaction and is secured by a second lien security interest in the
assets. Because leveraged buyouts place a greater debt burden on the company than do other types of
financing, buyer and seller must take a close look at the business's ability to service the debt.
Earn-Outs
An earn-out is a method of paying for a business that helps bridge the gap between the positions of the
buyer and seller with respect to price. An earn-out can be calculated as a percentage of sales, gross
profit, net profit or other figure. It is not uncommon to establish a floor or ceiling for the earn-out.
Earn-outs do not preclude the payment of a portion of the purchase price in cash or installment notes.
Rather, they are normally paid in addition to other forms of payment. Because the payment of money to
the seller under the provisions of the earn-out is predicated on the performance of the business, it is im-
portant that the seller continue to operate the business through the period of the earn-out.
Stock Exchanges
In some instances a business owner may want to accept the stock of a purchasing corporation in pay-
ment for the business. Typically, the stock he receives (if it is the stock of a publicly-held company) may
not be resold for two years. If the stock may not be freely traded, it is not as valuable as freely traded
stock, and its value should be discounted to allow for this lack of marketability.
There is an advantage to the seller in this kind of transaction. Taxes incurred by the seller on the gain
from the sale of the business are deferred until the acquired stock is eventually sold. There are several
tests that must be met to qualify for this tax treatment. Check with a competent accountant or tax attor-
ney.
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