| Seller finance that will enable a transaction to close | | | | money each year. And the rate of tax is based |
| between a business owner and a buyer in today's | | | | on the applicable tax rate in that year; not the |
| economy has become a very important | | | | rate the seller paid when the business closed |
| consideration in most business transactions; | | | | escrow. |
| especially for privately held companies. It's | | | | A further benefit to the seller from seller finance |
| become important not only because the banks | | | | is that the note provides a steady stream of |
| have reduced their amount of lending but also | | | | income in the form of an annuity. For many |
| because the banks are now reluctant to loan as | | | | sellers this is attractive as they may be moving |
| much of the purchase price. For example, if the | | | | to their next venture and are yet to create a |
| buyer brought a down payment of 20 per cent | | | | new steady stream of income. |
| the bank was willing to lend the remaining 80 per | | | | Another benefit of seller finance is that it |
| cent. | | | | encourages the buyer that the seller believes in |
| So the good old days are now behind us with the | | | | the business and all the disclosures that have been |
| banks now preferring the buyer to bring a down | | | | made and that the buyer has the ability to run |
| payment of 20 per cent, the seller to carry a | | | | the business effectively. This morale boost can be |
| note of 20 per cent and the banks will then fund | | | | important to buyers as they work through their |
| 60 per cent as long as the seller moves into | | | | decision making process. |
| second position. | | | | In addition to the above, seller finance will |
| This change of dynamics is making it difficult for | | | | generally pay interest on the seller note at a |
| sellers to decide if they really want to sell. Many | | | | much higher rate that the seller can get by |
| sellers are reluctant to carry a note because they | | | | investing the money in a CD or some other form |
| are worried the buyer will not make that | | | | of interest bearing account. |
| payment to them or the conditions of the loan | | | | When you bring all the above ideas together |
| may mean the seller does not start to get paid | | | | there is a compelling reason for the seller to fully |
| until 3 or 4 years after the transaction closes | | | | understand Seller finance and how it would benefit |
| escrow. | | | | the sale of a business. In some cases, a seller |
| There are down sides to seller finance but there | | | | may choose to get a sizeable down payment |
| are many upsides. Let's have a look at a few of | | | | from a qualified buyer and then carry a note for |
| them. | | | | the rest of the purchase price. Of course, if a |
| One of the main benefits to the seller agreeing to | | | | seller was comfortable with this situation it would |
| carry seller finance is that it delays the payment | | | | enable the deal to close escrow much quicker as |
| of taxes. Selling a business at the close of escrow | | | | the buyer does not need to apply to a third party |
| triggers a taxable event. However, the tax is only | | | | lender for finance which can often be a 6 to 12 |
| due and payable when the seller receives the | | | | week process; if the loan request is approved. At |
| money. For example, if the seller carries a note | | | | the moment, knowing a third party lender will |
| on $100,000 of the purchase price and the note is | | | | approve a loan request is one of the biggest |
| repaid at $20,000 per year for five years then | | | | drawbacks affecting the closing of many business |
| the tax due is not paid until the seller receives the | | | | transactions. |