When a business seller has visions of the closing table, they might imagine the buyer handing them a big check, a check that repays all the hard work and sacrifice that culminated in this moment of moving on.

While this may occasionally happen, the reality of business transactions is typically a bit more complicated. One major consideration you as a seller must contend with is the tax implications of that “big check”.

While you will have business transaction professionals (like your business broker) who are well versed in the current tax implications of each financing option by your side at closing, it is critically important that you have at least a basic understanding of the taxes you will need to pay based on the payment method you ultimately choose.

Each option will benefit either you as the seller or the buyer, but not both, so these implications will likely need to be negotiated.

Here is a basic run-down of possible payment options you may encounter and the implications for each.

All-Cash Closing

This rarely happens, but sometimes a buyer will come to the table with an all-cash payment, and this means that you as the seller will get all of your money up front. Be aware that taking such a large payment all at once may push you into a higher tax bracket, and that restricting yourself to just buyers who have all-cash offers will severely limit the number of offers you could potentially get.

Financing from a Third-Party

A buyer might use third-party financing for a down payment or for the entire purchase price, but these types of loans can be fairly hard to come by in the current economic climate. One of the services your business broker should provide is getting your business lender prequalified with the SBA (Small Business Administration). If the third party loan covers the entire purchase price, this type of payment also carries the same tax warning as the all-cash option, as you will be receiving a large sum of money within a single tax year, and may push you into a higher tax bracket.

Buyer Self-Financing

A buyer who owns a home or property may be able to self-finance the business purchase by taking out a second mortgage on the property. A warning for this financing method, if you are offering seller financing for the remainder of a balance after a down payment secured by a home equity loan, do not accept the property as loan security.

Seller Financing

This is a common option for sellers in these difficult economic times, as it can attract more prospective buyers. By offering seller financing, you are showing that you have faith in the future of your business. This type of financing benefits both the buyer and the seller, in that the buyer can purchase a business without having to obtain third-party financing or come up with an all-cash offer, and a seller can spread out the proceeds of the business sale over many years, thereby eliminating higher tax rates.

Earn-out

In an earn-out, you as the seller are conveying your faith in the future of the business much like in the seller financing option, only in this instance you are staying on in an active role. As the seller, you will need to have the terms of the earn-out defined in the purchase contract as well as an understanding that it is mutually beneficial for both parties to remain on good terms. Much like the seller financing option, with an earn-out you can spread sale income over more than a single tax year, possibly giving you a tax advantage.

When deciding which financing option works best for you and your prospective buyer, rely on the experience of your business broker and on your own judgment in the negotiation process.

Are you someone who has recently bought or sold a business using one of the financing options mentioned above? How did it work for you, and do you have any advice for those just entering the business sale process? Leave a comment or question here.

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com