New Jersey Business Brokers: Article About Holding A Seller Note
A large percentage of small business sales involve some sort of seller financing. It almost seems unrealistic to expect a lump sum payment from the buyer, although there are plenty of sales that happen where the seller does receive one payment. Talk to our New Jersey business brokers about the best options for your business.
There are certain advantages to offering seller financing. Most sellers will take advantage of the financing to increase the total price or negotiate different terms for the sale like the possibility of including a future earn out. Sellers may also reduce the tax implications associated with a business sale by offering seller financing. The following information explains this further, but is not a substitute for professional tax advice. Make sure you discuss taxes with your personal accountant before making any decisions.
When you provide seller financing you are agreeing to accept monthly payments. The buyer pays you a down payment, and then you agree to a monthly payment amount for the remainder. Many potential buyers view an installment plan payment option as a vote of confidence in the business. If a seller is willing to accept future payments from the profits of the business as compensation for the sale of the business, then the seller must be reasonably confident that the buyer will have the money to pay regular installments.
Choosing to finance the sale is a tough decision. It depends on a lot of factors including your personal need for the immediate proceeds from the sale and your confidence in the future profitability of the business. Discuss your personal goals with your broker and all of the details with the buyer.
The business brokers from Selby Associates of New Jersey would be happy to answer any question you have about buying a business or business advisory services.
One tax benefit of accepting payments is that you avoid a large income tax. When you sell for one lump sum, the government considers that as part of your income. So if you normally bring in $90,000 a year profit but sell the business for the lump sum of $250,000, you will be taxed on the additional $250,000. This will put you in a higher income bracket which automatically taxes you at a higher rate. By accepting payments, you are able to reduce your tax implications because you are accepting installment payments.
When you do an installment sale, you are able to defer taxes by reporting some of the income as capital gains. This helps reduce tax implications because you won't owe all of the tax money on the sale at once. Some business owners call this installment sale treatment. You are able to take advantage of installment sale treatment on things that have appreciated beyond the sale price.
Things that cannot be included in installment reporting include gains from inventory and depreciation recapture. But you are able to include the appreciation of the business goodwill when figuring out how much of the installment is actually taxed. Any interest charged on the installment payments is automatically considered earned income and will be taxed.
Basically, you save money on taxes because you are reporting gains on the sale as the installment payments come in, rather than all at one time.
All of this information can seem overwhelming, so make sure to speak with your business broker and your accountant before making any decisions.