You can invest in a company in two ways: debt or equity. You can either lend money with the expectation of repayment or you can buy equity which has no expectation of repayment. With equity, however, you also have a claim to the future earnings potential of the company. If you have the cash, you can purchase the business outright; however, if you don't have the money to pay for the business, there is one commonly used way to negotiate 100 percent financing.
Request the income statement and cash flow statement from the owner. Verify proof of income or cash flow on a monthly basis. For instance, if the company has an annual net income of $144,000, then the monthly income is $12,000 ($144,000/12).
Determine the amount you are willing to pay for the business. For this example, the owner is asking $500,000 for full ownership of the company.
Determine the payback period. This is the asking price divided by the annual cash flow. For this example the payback period is ~3.5 ($500,000/$144,000) years. This means that it will take ~3.5 years for the buyer to be paid back.
Create a proposal for the owner to agree to pay the full asking price in exchange for full seller financing (also referred to as creative financing). This means that you will pay the owner back over a four- to five-year period. The time period to pay back the owner should be longer than the actual payback period. If you default on payment, the business will go back to the owner.
Hire an attorney to write up a contract for the exchange. Closing costs for this document are usually $600 which should be paid by the buyer.
Create additional revenue streams at higher price points to increase net income. This will expedite your payment period to the owner.
It is not uncommon for companies to experience increased revenue growth with no increase in net income. Focus on net income, not revenues.
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