Buyers who want “a payments over time deal” are using you as “The Bank,” which is technically a seller-financed deal. This saves the buyer a ton of money, sometimes hundreds of thousands in interest payments and/or loan carrying costs. The IRS views payments over time as a “loan” in which interest legally needs to be paid by you (the seller) or the buyer. Most buyers who want payments over a period of time actually will ask and many times 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 paying 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 months x 10 years = $1,488,000 the interest is $488,000.
If borrowing $2,000,000 at 8.5%, monthly payments of $28,800 x 12 months x 10 years = $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, but instead uses you as the bank and saves hundreds of thousands in loan interest he would have paid 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 — the buyer does not pay the interest.
In our book, that is a total win for the buyer and a potential big loss for the seller.
On the other hand, selling for cash will allow you to sleep well at night and you have complete control to use the money as you please, if you please.
The Better Scenario: We would encourage an all-cash or mostly cash deal paid at the closing, for as high a multiple as possible, and if there is a portion paid out over a year, for 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 role of being “The Bank.”