What is the minimum down payment for the purchase of a company?

As a general rule, the down payment must cover 20% to 30% of the purchase price.

When you buy a business, the amount of your down payment counts, as it will affect your finances for years to come.

Although there is no simple formula to calculate the right amount for a down payment, it is important to show that you also take certain risks.

Many parties, lenders, investors, and even the buyer, are invited to take risks for you. The best way to demonstrate your commitment to these parties is to have a significant down payment.”

As a general rule, the down payment must cover 20% to 30% of the purchase price. However, lenders often take into account the fact that an experienced entrepreneur probably has different financial means than someone who has just started a business, so the percentage can vary.

Where does the rest of the money come from?

If you pay 20% to 30% of the purchase price, the rest of the funds can come from different sources.

A bank loan

This is a common way to cover part of the purchase price. This type of loan, also known as “priority debt”, usually has a fixed repayment schedule and a relatively low interest rate compared to other options. The terms and conditions will depend on a variety of factors, including the amount of your down payment, the guarantees available, and the company’s expected return.

Mezzanine financing

Also known as “subordinated financing” or “subordinated debt”, this is a more flexible type of loan that can be structured in many ways, and sometimes even considered equity financing, increasing your down payment amount.

This type of debt offers repayment terms tailored to the company’s cash flow and targets a return on investment that will be higher than the priority debt, but provides flexibility on how to achieve that return (i.e. a combination of a lower nominal interest rate and a variable return, such as a premium or a portion of royalties).

Vendor financing

Also known as “seller’s loan”, this financing is an attractive option when you want to relax your financial structure. In this case, the person selling the business takes a portion of the original price and agrees to be paid the balance at a later date, often after the full or substantial repayment of your priority claim.

This balance is usually secured by a lien on the company’s assets and assets. If the buyer defaults on his payment obligations, the seller may withdraw and take over the business, in some cases.

Often, the seller’s and the bank’s financing are combined. In this case, the seller’s privilege is subordinated to that of the bank. Another type of vendor financing is conditional payments, such as stock options or additional payments (earnouts), if the stated performance targets are met. These provisions keep the seller tied to the future success of the business, which can be useful in dealing with the usual surprises that occur during the first years of transition.

What is the minimum down payment for the purchase of a company?

As a general rule, the down payment must cover 20% to 30% of the purchase price.

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