What Business Terms Are Best for You?
Remember the old negotiating adage, “your price, my terms” when deciding what sale terms are important to you.
Getting all the money at closing.
Pros: You get everything you’re due.
Cons: You’ll probably have to take a lower price.
TIP: Buyers can often deduct the value of a non-compete clause (generally equivalent to your earnings for the years it lasts) as a business expense, but the value must be amortized over 15 years.
Financing all or part of the sale or accepting a payout over several years.
Pros: You'll probably able to command a higher price. Installment sales often offer tax advantages because you don’t receive as much income in any one year, which might raise your tax rate.
Cons: You run the risk of the buyer defaulting, and you make it imperative that you continue to stay involved in the business during the payout period.
Receiving a substantial downpayment even if you take back financing.
Pros: You'll get more money up front, reducing your risk of losing substantially if the buyer defaults. You can use the downpayment to satisfy any tax liability you have as a result of the sale.
TIP: If you want to maintain a relationship with the new company, write a separate employment agreement or consulting agreement so that if the employment deal falls apart, the sale doesn’t collapse.
Cons: Some buyers may not have the necessary funds.
Continuing to work for the company as an employee or consultant.
Pros: Gives you oversight if you are using a partnership or earnout deal. Keeps you involved in real estate, but at a less-demanding level. May be your only option if you’ve signed a non-compete clause.
Cons: New ownership may resent your presence. It may be difficult to adjust to your new relationship with other salespeople at the company.
Not signing a non-compete agreement
Pros: You can continue to be active in real estate and generate additional income.
Cons: If your name and reputation are one of your business’s big assets, you will substantially decrease its value. Most non-compete clauses are for five years or less and are usually restricted to the geographic area in which your business is located, so you aren’t giving up real estate forever.
Accepting Deferred Payment
Pros: Deferred payments mitigate the impact of taxes. They also provide an annuity-like stream of future income.
Cons: Future payments are made with depreciated dollars, which can drastically reduce the true selling price. There’s always a risk that the company might fail under the new ownership and there won’t be enough assets to complete the payments. In such a case, you’ll probably receive the company back.
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