September 17, 2008 2:31 AM EDT
Jeremy makes some good points. The amount of capital you put into the business is based on it`s worth and what you are buying. For a service business, no more than 20% down is fair. For a business with assets, you are actually buying the tangible assets, the goodwill of the business is the variable. The owner obviously believes in the business, otherwise they would not be offering you terms. 5 years is reasonable depending on the type of business.
Examine the statements of cash flows for the business to determine what is a reasonable expectation for your take home. See if it flows enough to support a salary to you after all expenses are paid. Keep your leverage to a minimum, and do a projection of what you can expect from the business if it stays the same, grows, or declines by 30%. If all the numbers work with a 30% haircut you can safely participate in the business. If the numbers do not work at a 30% decline, know that you may have to put additional monies into the business, which will be coming from YOU not the former owner. Identify where those monies will come from in case you need them.
Also look at the current owner`s situation, why are they selling? Retiring, relocating, cashing out?
Do your homework. Pay a consultant if you have to.