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Thread: Role of existing shareholder loan when buying a business

  1. #1

    Default Role of existing shareholder loan when buying a business

    Hi,
    I am looking at buying a business through a share purchase. On the last balance sheet there was a shareholder loan (due to shareholders) of $120k. Let’s say I’d offer $1M, $880k for the shares and $120k for the shareholder loan. As this is based on the last set of financials, existing shareholder loan might be different in the balance sheet on closing day.

    Now here’s my question: How would a change in shareholder loan on the books influence the overall purchase price? If the shareholder loan is only $80k on closing day, would that mean I’d also pay $40k less overall?
    Thanks

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    I'm just guessing here, but I'm not sure the shareholder loan would affect the sale price, unless there's something specifically written into the contract. I would think the price you offer is for the business and not a certain amount for this and a certain amount for that. Again, I'm guessing more than anything else, but I thought the way it worked is you'd pay $1million for the business and once you owned the business, you'd then be responsible for the shareholder loan. I think the previous owner would get to keep your $1million and do whatever they want with it. If you don't want to be responsible for the shareholder debt, I would think you would offer that much less for the business knowing you'll have to pay the loan after regardless of how much you spent on the business.

    Once again, that's more guess on my part than anything else and you can write anything into the sales contract.
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    To me it seems like that would depend on how the buyout was worded. If you offered 880K for the business and 120K for the shareholder loan the price would change based on the amount of the loan. So if it was down to 60K the offer would be 880+60. If you are offering 1 million for the business then it would be one million including whatever was owed on the shareholder loan. I think you need to specify exactly how the shareholder loan was a part of the deal otherwise you could offer i million and they could loan the shareholders 500K and you would be stuck with it. Just dot all the i's and cross all the t's when you write up the agreement.
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