There are many reasons for selling a business that you own. Maybe you’re reaching your “golden years” and want to sell your business before you retire. Perhaps you don’t have time to run your storefront and want to sell it to someone who can. If you’re looking to sell your business or other property, a structured installment sale is worth considering. As an entrepreneur / business owner – a structured installment sale may just be the perfect consideration for your business sale!
In a Ringler Radio episode, host Larry Cohen talks to his colleague about structured installment sales. A structured installment sale allows for “the sale of a property where you receive at least one payment after the tax year of the sale.” He went on to define “property” as any real estate or the sale of a business. When you have a structured installment sale, the payments can be made through an annuity and broken up into long-term payments.
Similar to a structured settlement, a structured installment sale can be very flexible. If the seller needs money immediately, they can choose to receive an immediate payment stream that addresses their current monetary needs, while the rest of the funds can be divvied out into periodic future payments. Structured installment sales strike a balance between maximizing what sellers make and minimizing the price that buyers pay.
There are two options to choose from when someone is thinking about selling their business or property: an installment sale or a structured installment sale. Are there differences between them or is one more beneficial than the other?
They both perform the same task for the business seller. Both installment sales and structured installment sales make payments to the seller over a period of time to meet their specific needs.
The difference (and arguably the most important distinction) is that installment sales depend on the buyer to make their payments. These payments are made via a deed, trust, mortgage. Structured installment sales have the buyer enter into an assignment through an assignment company, such as a highly rated insurance company. With an assignment, the buyer is letting the assignment company take over payments in their stead with a guaranteed insurance or annuity contract. The installment sale option essentially means the seller is acting as a creditor to the buyer, a risky choice in and of itself.
There are also tax benefits when accepting payments over time. In some cases, if planned well, tax on gains can be eliminated completely. When you receive a lot of money all at once, you’ll likely have to pay taxes on it. Spreading out your sale payments means you’re receiving less money at one time. This may make your taxes lower because you’re bringing in less income.
Here’s an example of a dentist selling their business. If the dentist sells their business for $2 million, they’ll be taxed on $2 million. In addition, they’ll still be taxed on their income as a dentist before they sold. If they break up that payment over time, they won’t be taxed on their income as a dentist and they’re receiving less money all at once.
If you’re thinking of selling your property or business, contact a Ringler consultant and learn more about this option. We provide peace of mind by helping you to secure long-term payments along with tax benefits. We’ve been helping clients since 1975 and you can learn more about Ringler here.