An acquired taste: before you but that business you're craving, consider seller financing to sweeten the deal

Entrepreneur, Oct, 2004 by Crystal Detamore-Rodman

Setter's Remorse

Even if the financial deal goes off without a hitch, the seller may not just ride off into the sunset, In addition to expecting progress reports, the previous owner could visit regularly. "Maybe the seller misses the business," Koehser says. "If you add financing, then the seller says 'It's legitimate for me to come in and look over your shoulder, because it's my money that's involved.'"

It's also not unusual for the seller to restrict certain business activities, such as selling assets and acquiring additional companies, until the loan is repaid. One of Martinka's clients, for example, is contractually obligated to get the seller's approval for other business acquisitions or pay off 80 percent of the credit note. The seller may go so far as to dictate the buyer's salary and limit profit distributions. Nonetheless, the smaller the loan, the less control the seller has over the buyer. "The larger the percentage of down payment," Cooper says, "the more the buyer calls the shots."

POWERS OF PERSUASION

Seller financing not only speeds up a business purchase, it also increases the likelihood that the owner will get an acceptable offer. If a seller is still reluctant to play banker, there are some other financial rewards that may be more convincing.

For starters, owners who offer financing generally command a higher sale price. "Buyers are often focused on achieving a purchase on terms that allow them to buy with as little 'cash in' as possible, even if the long-run costs are higher," says certified business appraiser Glen Cooper, president of Maine Business Brokers' Network in Portland, Maine.

Sellers may also reap certain tax advantages by providing financing. Indeed, if owners are willing to finance at least part of the purchase price, they may be able to report capital gains from the business sale in installments, thus avoiding a heftier tax bill. "This stretches out the capital gains tax into future years," says Cooper.

The ability to collect interest that would otherwise go to a mainstream creditor, such as a bank, is yet another incentive for sellers to finance the buyout. Because a seller-backed loan normally carries an interest rate of 8 to lo percent, owners can earn more than if their money was simply sitting in an interest-bearing account.

Nearly 33% of executives still consider stock options "an integral component to a competitive pay package."

CRYSTAL DETAMORE-RODMAN is a Charlottesville, Virginia, writer who covers the small-business finance market.