(Excerpt from Selling Your Business for Dummies – co-authored by the CEO of Sunbelt, the world’s largest business brokerage firm)

More typical than an all-cash deal is a deal where the buyer pays a portion of the price at closing and signs a promissory note to pay the rest of the price, plus interest, over a specified time period.  When you accept a promise of future payments, you’re issuing what’s called a seller financed loan.  When you hear business sellers say that they have to carry paper, they (often) mean they have to provide the buyer with a loan for a portion of their purchase price.

Buyers sometimes request that a portion of the purchase price be paid as a balloon payment, which is a lump-sum payment made at an agreed-upon future date, usually months – or even years – after the sale closing.  The benefit to the buyer is that by replacing the need for ongoing monthly payments with the promise to make a future balloon payment, the buyer can keep early cash flow working to
transition and build the business.  The risk, which sits squarely with the seller, is that the buyer won’t be able to make the payment when it’s due.  Chapter 14 has plenty of information on how to protect yourself when agreeing to deferred payments.

What’s in it for buyers (and sellers)

By offering to provide your buyer a loan, sellers boost your sale prospects in several ways:

- Sellers ease buyer concerns about the future success of your business.  By offering to accept deferred payments for part of the purchase price, you basically put your money where your mouth is in regard to your belief in a positive future for the business.

(Talk to your Sunbelt Midwest broker & your legal & financial advisors for further details)

 How it directly affects the Seller

Upside – tax advantages: By allowing the buyer to pay the loan off over a number of years, you spread the tax impact from sale income over a longer period than would be the case with a one-time payoff.

(Talk to your Sunbelt Midwest broker & your legal & financial advisors for further details)

Seller financing has great potential to offer advantages to both the sellers and the buyers in any transaction.  As in every business decision you are the only one who knows what’s right for you & your unique situation.

March 2012

During President Obama’s State of the Union address on January 24, 2012, he asserted
that taxpayers making more than $1 million should pay not less than 30 percent
in federal taxes. This is a clear indicator President Obama believes that the
federal capital gain rate should be increased to 30 percent for taxpayers with
over $1 million of taxable income.

On February 1, 2012 U.S. Senator Sheldon Whitehouse, democrat from Rhode Island,
introduced a tax billed named “Paying a Fair Share Act of 2012”. This act is
known informally as the “Buffett Rule” tax bill. It applies only to taxpayers
with income over $1 million. The purpose of the act is to cause taxpayers making
over $1 million to pay at least 30 percent in federal tax. Taxpayers would
calculate their taxes according to traditional methods and also by the tax
calculation required under the Paying a Fair Share Act of 2012. The result of
the two calculations would be compared and the taxpayer would then pay the
larger of the two calculations. This act will likely gain little traction so
its chances of becoming law are extremely low. But it is an indicator that not
just President Obama is interested in increasing the capital gain rate.

Rate Impacted By Multiple Items

Notwithstanding that President Obama and certain congressional members want to see the capital
gain rate increased, the Bush Tax Cuts, which were originally set to expire on
December 31, 2010 and were extended for two years, are going to expire on
December 31, 2012. If this happens, the regular top rate on capital gains will
rise from 15 percent to 20 percent. In addition, an obscure provision of the
tax code dealing with the limitation on itemized deductions will return in full
force when the Bush Tax Cuts expire. This provision, known as the Pease
limitation, increases effective tax rates on high-income taxpayers by reducing
the value of their itemized deductions. For the Pease limitation, by 2013 the
inflation-adjusted level of what is considered a high-income earner is expected
to approach $170,000. The Pease limitation will add about another 1.2
percentage points to the effective capital gains tax rate for high-income
taxpayers.

And that’s not all. The health reform legislation enacted in 2010 imposed a new tax
on the net investment income of high-income taxpayers, including capital gains,
effective January 1, 2013. That
adds another 3.8 percentage points to the capital gain tax rate. Without the
repeal or the amending of this legislation, this rate increase will apply even
if another tax cut extension occurs.

Put it all together, and unless another tax cut extension occurs, the top tax rate
on capital gains is currently scheduled to increase from 15 percent to 25
percent on January 1, 2013. Additionally, since 1978 the top capital gain rate
has been increased to 28 percent on several occasions.  So, if history is any indicator, the top
capital gain rate does have a chance of going above 25 percent.

Obama and National Debt

Right now it appears President Obama has a better than 50 percent chance of being
re-elected, notwithstanding poor approval ratings, a high unemployment rate and
a stale economy. If he is re-elected, he has already made it clear that be
believes the capital gain rate should be increased.

Even if a Republican is elected, the capital gain rate is likely to be increased,
not just because of all the current rhetoric regarding the capital gain tax
being considered a “rich people’s tax”, but because the low rates may have to
be sacrificed to achieve other objectives, such as paying down the national
debt. History shows this has happened before. In the 11 years from 1922 to 1933
the maximum capital gains rate was 12.5 percent. In 1934-35, it was raised to
31.5 percent and in the following two years it was raised to 39 percent. This
was the response Franklin D. Roosevelt (an Obama hero) had to the deficits
facing the country after the Depression.

Now or Later

With all the current talk about capital gains tax , the pending expiration of the
Bush Tax Cuts and the additional tax associated with the 2010 health care
legislation, now is the time to take action by any entrepreneur considering
selling his/her business during the next few years. A 15 percent capital gain
tax rate is certainly much more appealing than the risk of experiencing a 25 to
30 percent rate.

About the Author:

Monty W. Walker is the senior principal of Walker Business Advisory
Services, a CPA Firm with a national practice focused on providing business transition
planning and business transaction support services. These services are provided to Entrepreneurs and their
various advisors, such as Business Intermediaries, Accountants and Attorneys,
to manage the unique financial, tax, planning and procedural matters associated
with buying, selling and transitioning the ownership of a business.

There are several types of exchanges including the following:

1. Simultaneous Exchange

2. Delayed Exchange: STRICT LIMITATIONS

3. Build-to-Suit Exchange: (Improvement or Construction) allows improvements from proceeds of
exchange

4. Reverse Exchange: acquire exchange property before relinquishing original investment
(safe harbor if properly conducted, reasonable time)

5. Multi-asset Exchange: Both real and personal property

Benefits of such a transaction include
the following:

• May maintain an equity position
• Taxes may be deferred or eliminated by this type of transaction,
• Gain from depreciation may be postponed,
• Owners who are burned out or would like a new or bigger opportunity can exchange their
  business, home or other property for a business and/or real property,
• Does not require financing

References

United States Internal Revenue Service, Publication:
Form 8824, Like-Kind Exchanges, http://www.irs.gov/pub/irs-pdf/f8824.pdf
(November 25, 2011, last updated February 25, 2011).

Small Business Review, A Primer on 1031
Exchange, Todd R. Pajonas,,
http://smallbusinessreview.com/finance/A_Primer_on_1031_Exchanges/ (2011).

*This article is not deemed to be legal or tax advice provided by either the author or Sunbelt, it
is merely the opinion of the author at the time of publication.

To learn more, please contact the author: Michelle Olmstead, Sunbelt Business Broker, attorney and
entrepreneur, to assist you in your plan to buy, sell or exchange a business.  Michelle Olmstead, molmstead@sunbeltmidwest.com or (612) 354-0539.

Sunbelt Business Brokers

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How you can drive growth
How do you refocus your energies and carve out the time necessary to work on the business more strategically? One very powerful solution is to join a peer advisory group. A peer advisory is a collection of ten or so non-competing owners who get together on a regular basis, along with a professional facilitator, to discuss business issues or opportunities. Their sole mission is to help each other succeed. Owners who commit to this process rank it as one of the best business decisions they ever made.

By their very nature, peer groups create an opportunity to work ‘on’ the business. Your peers can be more objective about your business, and as such, they see your blind spots. They point out when you are focused on your goals and when you are wasting your time. They help to overcome the isolation of being at the top, serve as a sounding board for new ideas, offer practical solutions to business problems from people who have lived them, and create the accountability needed to thrive. Since these groups include other owners like you, they have no vested interest in any one idea. You hear what you really need to hear, not what someone wants you to know because of their own self-interest. What makes peer groups work is the fact that the combined experience of a team of business owners tackling problems is far superior to that of any one individual.

Owning a business is a challenge. For those owners who are truly committed to working on their business and growing their companies, peer groups can be a powerful tool.

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