Originally created 11/30/03

Think creatively when financing a new business

With the current economy in the doldrums, small businesses failing, bank credit tight and interest rates near historical lows, now might be the time to purchase a business or the property you've been leasing. Many business owners are looking to pursue other interests, retire or work for someone else.

The selling price of a business is always subject to negotiation and usually represents what an owner hopes to receive, not the ultimate sales price.

Once both parties agree upon a price, a win-win financing solution for both the buyer and seller should be sought. A seller willing to be flexible with financing can sell the business more easily, often closer to the asking price.

Here are common scenarios:

Managing: Many times the owner simply wants to get out of the day-to-day business without selling his interest. One solution is for a potential buyer to manage the business. This requires no equity from the potential buyer and allows him the opportunity to gain experience and perhaps gradually purchase an equity interest.

Leasing: Purchasing the business and leasing the building from the seller lowers the entry cost for the buyer and allows the seller to leave the business and keep the asset. This allows the seller to avoid paying capital gains tax on any real estate appreciation.

Leasing/purchasing: This is similar to leasing, but includes a purchase option on the building. This benefits the buyer by allowing him to establish the business and build equity over the term of the lease. Some sellers allow a portion of the lease to apply against the purchase price permitting the buyer to build equity. The seller benefits by having a portion of the lease taxed at the lower capital gains rate.

Owner financing: This is typically done for 10 percent to 50 percent of the purchase amount, but it is possible to finance the entire amount. The seller exercises due diligence in this situation to make sure the buyer can succeed and make payments on time.

Installment sale: This financing is a variation of owner financing with additional benefits for the seller. Rather than treating the entire sale up-front with the seller earning interest on the loan, a seller is actually selling the business in installments. This allows the seller to spread out any profit from the sale over the length of the payments. The biggest advantage is in the deferral of capital gains tax over many years at tax rates that are declining.

Even in today's economic climate, owning a business is possible if creative financing solutions are explored.

Thom Thies is a business consultant with the Small Business Development Center Network. To reach the Augusta office, call 737-1790.


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