Funding the Purchase of a Business Interest       

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Funding the Purchase of a Business Interest

Once the purchase price of a decedent's stock has been determined - either in a buy-sell agreement or through negotiations with the estate's representative - the buyer faces the problem of providing cash.

WHAT ARE THE ALTERNATIVES? AT WHAT COST? WHAT CASH FACTORS? POSSIBLE OBSTACLES?

There are five basic options:

For each $1 of purchase price:

Items which add to the cost of buying the business.

Each Alternative is viable.

1. Liquidating existing cash/capital

100 cents. +

-principal                               -lost future earnings on principal.

*IF the buyer has sufficient       cash  or other assets at the time of purchase.

2. Borrowing from a bank and paying a lump sum to the estate

100 cents. +

-principal  

-interest paid to the estate.

*IF loan can be made

* IF interest rates are  reasonable 

*IF after-tax, disposable income can absorb interest & principal payments.

3. Making installment payments to the estate out of personal income

100 cents. +

-principal                            -interest paid to the estate.

*IF the estate is willing to accept installment payments.                                     

* IF the buyer & estate agree on the duration & interest rate of installments.

4. Company makes installment purchase out of future profits.

100 cents. +

-principal                            -interest paid to the estate.

*IF sales and income don't drop.                                              

* IF profit margins remain the same.                                            

*IF corporate income taxes remain level.

5. Insuring the purchase price in advance.

Discounted $                             (less than 100 cents)

-premium payments

*IF the stockholder is insurable.

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Copyright 2001 Kaplan Management & Insurance Services
Last modified: June 13, 2012