There is one irrefutable truth about selling your business:
Buyers are skeptical.
And almost every buyer is going to perceive you, the owner, as having an unfair advantage. Because at the end of the day… you do have an unfair advantage.
A buyer can ask thousands of questions, comb over all your financials, and spend 12 hours per day doing research until their eyes bleed…
But no matter what they will never understand your business like you do.
In this article I’ll explain why understanding the concerns of your buyer is beneficial not only to them but also to you.
Then I’ll go over 3 must-know strategies you can use to set a buyer’s mind at ease.
Plus I’ll show you how these same strategies may protect you at tax time – and keep good old Uncle Sam from taking you to the cleaners once your business is sold.
What you need to do as an owner is reframe the entire transaction:
Instead of thinking in terms of “winning the fight” or “coming out on top”…
Imagine the process of selling your business as a coaching session:
You have to make the buyer believe they are going to be successful.
If they don’t fully buy into the idea of their success in your business… they won’t buy your business. Simple as that.
But as the saying goes…
Talk is cheap.
And when a buyer doesn’t believe they’ll be successful, you aren’t going to “talk them into it”. After all, you want to get paid. And the buyer knows this.
Instead what you’re going to do is place a bet on the new owner’s success.
You’ll do this by sacrificing some cash up front – offering seller financing, earn-out payments, or becoming the new owner’s landlord in lieu of one lump sum.
And by implementing this strategy your business will appeal to a far larger pool of buyers making it far easier to find the “right” buyer.
Now I can almost hear the dissenters crying out:
“I just want my money. I’d rather get paid up front than play games on the back end”
Let me say this: I understand.
Money up front is great. Lump sum payments are amazing. No one is arguing this and I want my clients to get as much money up front as possible.
But it’s not the only way to close a good deal and there are 3 powerful reasons to work with buyers rather than take a hardline stance on full payment:
- Over 70% of businesses listed for sale never get sold.
- It’s not always realistic to close a deal and get all your cash up front. Deals are killed left and right by owners refusing to take any delayed payments.
- If you’re looking to retire – or even just start a new chapter in your life – the worst deal isn’t “less cash up front”… It’s “no deal at all”.
I’m not saying you need to “get the short end of the stick” or give the buyer a mile instead of an inch…
But nuking the deal and shutting your business down is far worse than making an agreement to take a bit of upfront stress off your buyer.
The key here is to stop trying to “win negotiations.”
And once you reframe the transaction from “winning” to “understanding the buyers’ concerns” you can implement creative financing strategies to address these concerns…without creating a raw deal for yourself in the process.
From the buyer’s perspective, when you agree to some form of delayed payment you are saying: “Yes I believe you will be successful – otherwise how will you pay me?”
This is one of the most powerful psychological deal-making tools in your arsenal. After all, if they crash and burn and can’t make the payments you both lose.
On the flipside, you as the seller may benefit in lower taxes than you would otherwise pay on a large lump-sum payment.
Because what you keep in your pocket after taxes is much more important than the actual “price tag” on your business.
Now let’s dive into the 3 strategies:
Seller Financing
Full cash buyers are rare. Seller financing on the other hand is more common than you might think.
Seller financing a small portion of the sale price can influence eligibility for SBA 7A loans. It can also reduce the buyer’s required cash down payment to only 5% of the purchase price. More on this in another article.
And if you want your business to appeal to a much broader pool of buyers, a smaller down payment is the main tool you have at your disposal.
Again, you are looking for the right buyer – why not gather as many potential buyers as possible?
Earn Out
If your buyer has specific worries – like losing key clients and customers after the transition – you can use Earn Out to put their mind at ease.
An Earn Out strategy is especially useful if the buyer’s concern is overhyped:
Let’s say the buyer is raising a fuss about losing key clients once you as the owner are out of the picture.
You know this isn’t a likely problem so you agree to take $400k off the purchase price and instead receive $500k in earn-out payments over 3 years.
Earn Outs should be explicit and quantifiable across a reasonable timeframe:
“Upon the closing date Seller shall be entitled to receive on a quarterly basis 5% of the gross revenue received by Buyer from ‘X’ Customer for a duration of three (3) years from the date of closing.”
Lease Your Business’ Real Estate
Owning the real estate your business occupies gives you the massive advantage of flexibility.
Real estate allows you to craft creative agreements that are advantageous to both you and the buyer.
For example, the buyer might not have enough cash on hand for a down payment on the business and the building.
In this case, you could offer the buyer your business—name, contracts, staff, equipment, etc.—while you retain ownership of the real estate and lease it back to them.
It’s also common for the owner to have a lower interest rate than what the buyer could get for purchasing a business. This means they’ll pay you less in monthly rent than they would pay on a loan with a higher interest rate.
Now let’s talk about tax advantages:
With earn-out and seller financing arrangements you’ll be deferring a portion of your payout into the future. This can lead to a tax advantage over taking one lump sum.
For this article though we’ll take a deep dive into the real estate example which offers several advantages:
- The income generated from rent is often taxed at a lower rate than proceeds from a business sale or earned wages.
- Real estate also allows for depreciation and other deductions based on interest and operating expenses. So maintaining ownership of the real estate can give you a continuous stream of rental income – often with a lower tax bill than selling it outright.
Plus, if you do need cash tied up in your real estate it’s possible to “cash out refinance” which isn’t taxed (unlike earned income or capital gains from a business sale).
At the end of the day selling your business is both art and science.
It’s about understanding not just the value of what you’re selling but also the concerns of the buyer – and making them believe without a shadow of a doubt that you believe they will be successful after the deal is done.
If you understand these 3 strategies, you’ll be able to structure your deal to instill that belief…without losing a boatload of your profits on taxes.
If you can navigate the buyers’ emotions — and the tax code – you’ll often walk away with a better outcome than an owner who’s only seeking a simple upfront cash deal.
Remember it’s not about winning or losing; it’s about crafting a deal that works for everyone involved…without Uncle Sam taking you to the cleaners.
If you’re interested in learning more about how I can help you sell your business shoot me an email – sean@tws-advisory.com