Representing a loan used to purchase a business

Many people believe that when a loan is taken out to purchase a business, the business itself is responsible for the liability. However, this is not entirely accurate. In most cases, the loan is taken on by the individual or business entity that is purchasing the business. The person or entity securing the loan is responsible for its repayment, not the business. It's important to remember that when forecasting for a business, we're looking at the entity as a whole, not just the individual or business purchasing it. In other words, we are forecasting for the business as an entity, not for the individual, and a business typically does not typically pay for its purchase.

When a business requires cash, it can obtain a business loan. The business is responsible for repaying the loan and receiving the necessary funds in exchange. When purchasing another business, the buyer exchanges cash for the assets owned by the existing business. It's important to note that adding another liability to the newly acquired business can decrease its value and create an unbalanced Balance Sheet.

It may help to think of this from the perspective of a business forecasting for purchasing another business in LivePlan. That financing entry for the purchase of the new business falls under your books. The assets and liabilities of the purchased business become yours once the purchase is finalized. 

It's important to remember that the structure of a business purchase can be complex. Lawyers and CPAs specialize in this and should be consulted for these purchases. Having said that, the best place to represent the company's purchase in LivePlan is through the Starting Balances. The Paid-In Capital section of this entry should represent the amount paid for the company. 

From here, it will be up to the purchaser to determine how they want to reflect the loan liability. If the purchaser wants the purchased entity to receive the liability for its purchase, then that loan goes under financing as a loan prior to the start date. If the purchaser wants to retain the loan liability, they can forecast dividends to cover the loan payments.

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