Paying a percentage of profits

Consult with your accountant if this should be treated as an expense.

There are no built in functions to do this automaticly just multiply your gross proceeds by .25 and cut a check for that amount.

It seems to me highly unlikely that either the down payment or the monthly payments should be considered an expense. As Allan Martin said, "CONSULT WITH YOUR ACCOUNTANT".

payments

original

Quickbooks?

After I posted, it occurred to me that what I am describing is akin to paying a commission on each invoice. However it is treated in accountancy--loan repayment or such, I am very interested in how to "mechanically" accomplish the calcalution with as few contortions as possible.

Thanks for the advice, Stu B.

My recommendation would be to do this manually each month and NOT try to do it with automation in QB. It's a very simple matter to do manually and gives you total control over the process and amount paid.

At the beginning of each month, run a Profit and Loss report for the prior month, see what your gross revenue is, multiply by 25% and cut a check for that amount to the person you bought the business from.

As already stated, these amounts will NOT be expenses of the business but rather these payments amount to paying for the purchase of the business on the installment method.

Thanks Mark

I don't want to presume anything, but have you calculated what your likely accumulated losses are going to be for four years, and can you sustain those losses? I don't know of a business (save for maybe Microsoft and a few other very elite and similarly monopolistic businesses) that could pay a 25% royalty on sales and even break even. If you have very rich gross margins over 50% and net margins (after all expenses) of maybe 15%, you would in that case be running losses each year of about 10% of sales. If you are in a very competitive business with gross margins closer to 25% and net margins of around 5%, you are drowning in payments, running losses each year around

If you are wealthy enough, and planning for a very long run, all of this may be okay (but in this case why not just pay the existing owner off up front?) If you actually don't have the cash to pay for the business, and were planning to pay him from surplus cash the business generates, then you have a potential problem. Depending on whether business is high or low margin, a sustainable royalty rate is usually between 5 and 15% of sales, and above

Aren't you giving away every incentive you have to grow the business? Every time you double in size, you accelerate your seller's payments at the same time. That's a great deal for him and a lousy deal for you. What makes a lot more sense to me is to settle on a price, settle on an interest rate, and settle on a monthly payment. If sales in the business in a given month cannot support the payment, he should defer the payment with interest. If he won't agree to that, then at least settling on a fixed payment each month gives you an opportunity to use growth in the business to reduce your effective monthly royalty. That's a pretty positive incentive system.

As a matter of negotiating a good deal for yourself, you should be willing to walk at least twice if the seller doesn't give you a fair deal that allows you to stay in business successfully. If the seller is so greedy, or so clueless about business, that he doesn't understand why a 25% royalty on sales will drive any business into the ground, then probably you should find a different seller.

Will,

You have no idea what you are talking about. Basing the sale of a personal service company on a percentage of future billings is for the protection of the buyer. Structuring a sale in this manner is very common.

Personal service companies have a relationship sometime a close bond with their clients. When that business is sold the relationship is gone and there is no guarantee that the client will stay with the new owners. Sales structured on furture billing makes sense.

Allan, I was suggesting a fixed payment with a protection for the buyer based on a percent of sales when he was not able to cover the fixed payment. That gives him identical protection but gives him the possibility of an upside.

He didn't specify what happens in the case of a default. In that case does the full original purchase price apply? What if the profit of the business doesn't allow a sustained 25% royalty on sales and he just cannot make the payments?

I actually don't think we have any disagreement. It's just that as usual you don't read carefully, and you start every post with canons all firing full force.

The OP only wanted to know how to post the payments in QB. Your the one firing all sorts of extranous canons. Any who there is always additional financing that can be obtained if cash flow problems arise.