NTEREST. WHO PAYS. YOU? LOT HIGHER MULTIPLE FOR YOU ASSUMING THE ROLE OF A BANK?
Rather than waiting 5, 6 or 7-10 yrs to get paid!
The sale of your agency will be an asset purchase.
– Approx 90% is Good will which is cap gains
– the rest of the purchase spread is allocated to Furniture fixtures, client list, business name, covenant not to compete for the owner and possibly others, each with separate values that I can give some guidance from numerous other deals of similar kind as your agency. (a small % of the overall deal is ordinary income).
Buyers who want “a payments over time deal” are using you as “The Bank”, technically a seller financed deal. This saves the buyer a TON of money….sometimes 100s of thousands in interest payments /loan carrying costs. The IRS views payments over time as a “loan” in which interested legally needs to be paid by you OR the buyer. Most buyers who want payments over a period of time actually will ask the seller and many time get the seller to accept “inclusive of imputed interest” wording which means the seller pays the interest out of the payments over time. Can you imagine taking out a loan and the lending institution pays the interest?
Here is an example of how this translates into real money $.
For example, a $100,000 loan with an 8.5% annual percentage rate would require monthly payments of $1,240 over 10 years, while the same loan with a five-year term would require monthly payments of $2,052.
If the loan is 1,000,000 at 8.5% monthly payments of 12,400 x 12 month x 10 yrs = 1,488,000 The Interest is 488,000.
If borrowing 2,000,000 at 8.5% monthly payment of 28,800 x 12 months x 10 yrs = 2,976,000 The interest is 976,000
So, to add insult to injury, the over time buyer does not get a loan from a bank, he uses you as the bank, he saves 100s of thousand in loan interest to a bank, he often makes you accept a retention payout and calls it “an earn out” instead of retention and you pay all the interest to the government not the buyer.
In my book that is a total win for the buyer and a potential BIG lose for the seller.
On the other hand, CASH will allow you to sleep well at night and you have complete control to use the money as you please, if you please.
BETTER SCENARIO: This is why I would encourage an all or mostly cash deal paid at the closing, for as high a multiple as possible, and if there is a portion over a year, as an example, the buyer would pay the interest not you.
Note: even if you convince a buyer to pay you interest in a seller financed deal…. you Need to be paid a significantly HIGHER multiple of Revenue for the courtesy of you purposely placing yourself in the self inflicted role of being “The Bank”.