Seller financing is a common structure in the sale of service-based businesses. In this arrangement, the seller provides all or a portion of the financing needed for the buyer to acquire the business, typically through an installment agreement.
How Seller Financing Works
Option 1 converts the business value into passive income payments: The seller finances the full purchase price structured as a loan with interest. This can be structured to maximize tax benefits. Hemenway works with Sellers to ensure Sellers receive the highest net revenue that meets their goals. This option usually leads to a higher sale price.
Option 2 converts the business into funds at closing and the balance financed by seller: The seller receives a portion of the purchase price at closing and the balance is held as a loan. This option usually leads to a lower sale price than 100% financing.
Payments are made over time, usually spanning 5-10 years, at an agreed-upon interest rate.
The seller may retain a security interest in the business until the loan is repaid.
Hemenway works with sellers on both options to meet their needs
Benefits
Tax Advantages of Seller Financing
Capital Gains Tax Deferral
Instead of paying capital gains tax in a lump sum, the seller spreads tax payments over multiple years, lowering the annual taxable amount.
Interest Income
The seller earns additional income from interest on the loan, increasing total proceeds from the sale.
Lower Immediate Tax Burden
Spreading payments reduces the immediate tax hit, preventing the seller from moving into a higher tax bracket in the year of the sale.
Higher Business Valuatio
Offering financing can attract more buyers and potentially lead to a higher sale price due to increased affordability.
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