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© Copyright 2002-2003. All rights reserved.
Page 34
How To Investigate Any Business Opportunity
(3) Funds as a reserve to allow for errors in expectations. 
A buyer must think beyond the purchase price to determine the amount of capital he needs. Unless he
does he will find his resources embarrassingly and probably disastrously wanting. Here are some ques-
tions that must be asked about his capital needs:
Do I have enough capital to pay the purchase price?
Do I have enough capital to support 1 to 3 months' operation - such as payroll and other cash ex-
penses - while the business reaches a self-supporting stage?
Do I have some extra capital to cover needs I may have overlooked (perhaps 10 to 15 percent of the
purchase price) ?
Types of capital. There are two basic types of capital:
(1) Equity capital - investment in the business by the owner or owners, and 
(2) Debt capital - borrowed capital that must be repaid.
Equity capital is often called risk capital. Those who furnish the equity capital are expected to take the
primary risks of failure and to reap the benefits of success. The equity capital provides a margin of
safety for a lender. The greater the amount of equity capital, other things being equal, the easier it is to
get debt capital.
The primary source of equity capital is the personal savings of the buyer of the business. Although many
small businesses are incorporated, the sale of stock is seldom a source of capital for the small business.
Few buyers, however, have enough personal savings to finance the purchase of a small business with-
out any debt financing. An individual may borrow money for the purchase of a business by obtaining a
personal loan, by borrowing against insurance policies, or by re-financing the mortgage on his home.
These debts are not direct debts of the business, but the debts of a small business and the personal
debts of the owner cannot be completely separated. Banks are the principal institutional source of debt
capital for small businesses.
The seller as lender. In the sale and purchase of Sam's Market, the buyer’s savings plus a bank loan
were not enough to finance the purchase. Bill (who needed more financing) and Sam (who wanted to
sell his business) reacted in a manner quite common in the financing of the sale of a small business.
Sam agreed to accept payment of part of the purchase price over an extended period of time.
The seller is sometime a source of capital to the buyer of a small business, as in Bill’s case. A happy cir-
cumstance if it is handled properly. Before jumping at the chance, however, the buyer should ask him-
self these questions: 
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