When it comes to selling their property management company, most owners think about a sale where they walk away from their business, and have a lump sum in their pocket. It’s the more “traditional” route, and some think it’s the only option. While it may be the right choice for some, there’s another path that can create additional options for working a deal and has the potential to yield a higher sale price and increased proceeds in the end. Sounds interesting, doesn’t it?
Let’s talk Owner (or Seller) financing…it’s a transactional model where the owner gets a down payment on the business at the time of closing and then finances the deal with the buyer over time. Effectively, you (as the Seller) are serving as the bank, and we all know that banks have quite a good model for making money. Here are some points for consideration and reasons I think it could be a good alternative for many owners.
TAXES!!! First, it mitigates some of the tax issues that sellers face when receiving a large lump sum in a traditional sale. Your CPA would be your best authority on this, but depending on the size of the sale and your tax bracket, you could benefit dramatically from spreading your capital gains tax liability over 2 – 5 years instead of tacking it on to the current year’s income. This can be particularly appealing if your next move is retirement and your tax bracket will drop in the coming years.
**July 2023 UPDATE: With SBA(7a) rates 10.5-13%, the cost of borrowing money is the highest its been in 22 years. That means a much smaller pool of buyers that have a cap on how much money they can pay for your business. Owner financing looks alot more attractive now.
Second, you can attract more buyers by taking traditional financial institutions out of the picture and gaining the ability be creative when negotiating a deal that works for you and the buyer. When a buyer uses a traditional lender, they’ll be subject to the lender’s policies including debt to income ratios, possible appraisals, debt coverage, and more. Lenders are becoming more risk averse in today’s market, and interest rates are very high. In a tight money environment, banks may not be willing to finance your full asking price, even if a buyer is willing to pay it. Seller financing gives you both the ability to determine what your business is worth and how the buyer pays you back over time. Even if a lender is providing some of the funding, they could be much more willing to lend when the owner carries part of the note.They understand that an involved seller increases the chance the new owner will succeed, and therefore, lowers their risk in lending.
Third, you can retain some control within the business and possibly even benefit from future growth. You can request to receive regular reports, so you can make sure the new owner is performing well enough to pay back the loan. You can influence how business gets done and make sure the clients you worked so hard to sign stay satisfied. The transition can be the toughest part for the buyer and seller, and the seller’s participation can be key to its success.
Finally, you have the chance to increase your net earnings from the sale. You will collect the interest that would normally go to the bank. Between the earned interest and a potentially higher sales price, you could be ahead 10 – 15% over a traditional banker-funded sale before you even look at the tax benefits. You can also build earn outs into the agreement to get yet another source of bonus revenue. An earnout is a contractual provision stating that the seller gets additional compensation if the business achieves specific financial goals, usually stated as a percentage of gross sales or earnings. As you protect the business by focusing on retention, and help the business grow by referring clients, you’ll earn back some of the new revenue without the challenge of operations. Not a bad bonus, huh? Yes, there’s risk in owner financing, and I wouldn’t try to say there isn’t. In a worst-case scenario, the new owner defaults and you have to take back the business. But with risk comes return, and that risk can be mitigated by carefully vetting a buyer (with the help of your favorite Broker, of course) structuring things in a way to maximize available protection. We help you think like a banker by carefully evaluating a buyer’s financial position, industry experience, and , and constructing clear and tight agreements for the process.
Granted, this process will not be for everyone, and that’s ok. We’re here to help you evaluate all options and determine which one will work best for you. Considering the conversion of your business from an asset to an investment. You’d probably invest your sale payout in the stock market, anyway; wouldn’t you rather invest in a company where you can oversee and influence its growth?
Seller financing offers owners more flexibility, more choices, and more potential value for their company. I think it’s an option every seller should consider. Curious about what your property management company might be worth? Click the link
About the author: Patrick Hurley
Maximizing rents is the most effective way to maintain and grow your company’s overall worth on the market. Smart property managers understand its importance and how to do it well.
He’s a Tallahassee native with almost 20 years of experience in the property management, real estate, construction, and business brokerage worlds. Having owned, operated, bought, and sold property management companies in the past, Hurley is in a unique position to help others in the industry find their exit. He’s been described as dependable, highly efficient, effective, and hard-working with a no-nonsense attitude. He takes pride in his professionalism and attention to detail and focuses on his client’s desired outcome.
Patrick still meets with every client and passes along as much knowledge as he can. He frequently gives back to the property management community in the form of professional speaking and value-packed article content. When he’s not helping others with a business transition, you can find him adventure-seeking with his young family.