Seller Financing Has Two Hidden Advantages
Seller financing seems to be a stick in the eye for the seller; it’s exactly what he did not want to do. He was looking for, expecting and deserving, the big hit – a hit capable of changing his life dramatically, a final payoff for an enormous work effort.
Unfortunately, there are far fewer buyers in this difficult economy and only a few banks that are willing to take on a commercial risk and lend. So, if there is a willing buyer and a willing seller, then seller financing may be the only way to accomplish the goals.
There is, however, a benefit for the seller – if the buyer steps into the seller’s LLC, becomes the managing director, while leaving the previous owners on as members, the following can be accomplished: The buyers can possibly refinance the business easier than if they acquire bank financing and thus the original owners receive the refinancing benefit and the new owners pay the debt, with the old owners financing the portion that could not be refinanced. A partial win.
Alternatively, if this cannot be accomplished, perhaps the old owners have to take on being the bank for the entire deal. The previous owners receive weekly or monthly distributions from the LLC and therefore, while taxed as income, the significant capital gains tax can can be avoided altogether.
That can be a huge savings and a valuable enticement to do seller-financing.
This is not the preferred way, but in the current economic environment it may be the only way and at least there is a huge uptick in the results because of this.
Another benefit is the interest rate. In today’s investment world an enjoyable return on one’s investment is hard to come by. The stock market is in trouble, real estate is tanking. So where can one get a fair return on their investment capital? Owner-financing!
If the seller’s takeback note carries an 8-10% interest rate the seller can enjoy a nice return on the note, better than anywhere else. Thus, the long-term return based on avoiding the capital gains tax and further enjoying the increased interest rate are at least two benefits to support owner financing. These can account for a very enhanced return and are thus worthy of serious consideration. Besides, what alternatives does one have? The banks are, for all practical purposes, “out of business”.
