Installment Business Sales Offer Some Advantages
My ol’ uncle Ollie used to say: “The two happiest days in a man’s life are the day he buys a boat, and the day he sells it.” The same can be said of a business.
Q. I am at a point in life where retirement is attractive, but to do so I have to sell my small business. The most likely buyer is my foreman who has been with me for 31 years. He has very little cash to make the purchase, but has offered to give me a note payable over 10 years. Does this make sense?
A. It’s done every day. An all-cash deal is always preferred, but most buyers of small businesses don’t have adequate, ready funds to effect such a transaction.
Taking back a note (called “seller paper”) for the majority of the purchase price will allow you to get your firm into capable hands that will have the best chance of assuring successful continuation of the business. In most cases, this approach also affords the highest selling price.
If you do this kind of deal, make sure the selling price is realistic, however. The income generated by the business should allow for a reasonable salary for the new owner/ operator, and for timely payments on the note you’ll hold.
If you try to squeeze to much out of the deal, you could stress the firm and its buyer to the point of failure. An installment sale will allow you (or a trustee) to hold on to the shares not yet paid for, releasing them periodically as payments on the note are made.
Indeed, you might want to have all of the shares that are initially pledged as collateral held until the entire note is paid off. You could also seek to collateralize the transaction with assets of the buyer in addition to the stock in your firm.
With an installment sale, it is possible to have the gains on the stock or capital assets of the firm taxed only as payments are received. Check with your accountant on this.
It’s a good idea to get enough cash up front so that the buyer’s full energies and talents are directed to the profitable operation of the firm. If there isn’t the threat of personal financial injury to the buyer if the firm fails, he or she probably won’t feel the motivation to do the “impossible” when such performance becomes necessary.
How much cash is enough? It really depends on the resources of the buyer. A significant portion of a buyers personal assets - especially liquid assets - should be at risk until you’ve been paid off.
But, remember, your interests are not best served by ultimately getting the business back.
All of this means that your primary goal should be getting your firm into the control of the most capable, dedicated buyer you can find. This can be even more important than the price and terms you secure.
Of course, you have to be willing to give the buyer a free hand in running the business. Your concern for getting paid shouldn’t translate into keeping your fingers in the pie once a sale is effected.
Q. I recently attended a seminar where the speaker said the keys to success for an entrepreneur are three four-letter words ending in “k.” I remember that work and risk were two of them, but forgot the other one. Did you ever hear this?
A. You’re in luck! Good fortune - or luck - is typically regarded as the third component of the oft-discussed “formula for success.”
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