- Author Chris Hadjiyianni
- Year Date 2019
- Location Winnipeg
- Category Business
Owners wishing to sell their businesses to management—specifically, key employees—face two unpleasant facts: Their employees have no money (most likely) and they cannot borrow any, at least not in sufficient quantities to cash out the owner. Thus, each transfer method described in this white paper uses either a long-term installment buyout of the owner or someone else’s money to complete the buyout. The last method discussed—the modified buyout—uses both an installment buyout and someone else’s money.
Long-Term Installment Sale
A long-term installment sale typically follows this course:
1. The owner and buyers agree on the company’s value.
2. At least one employee agrees to buy the company by promising to pay the agreed on value to the owner.
3. The former owner holds a promissory note with installment payments over a 7–10-year period with a reasonable interest rate, signed by the buyers. The note is secured by the assets and stock of the business, and the personal guarantee and collateral (usually residences) of the buyers.
4. Little or no money is paid at closing.
Owners wishing to sell their businesses to key employees must understand that they are transferring their businesses and receiving nothing in return other than a promise to receive the purchase price from the future cash flow of the business, since there is no other source of cash available to the employee/buyer. If the new ownership cannot at least maintain the business, the former owner will not receive his or her purchase price.Fortunately,there are several planning steps that owners can take to reduce the significant risk of nonpayment.
The first step is to have the buyers pay the owner what he or she wants in the form of non qualified deferred compensation payments, severance payments, lease payments, or some similar means of making tax-deductible payments directly from the company to the owner. This technique minimizes the net tax cost of the buyout and thereby makes more cash available to the owner.