It seems intuitive: a deal requires compromise.
Sellers and buyers each have their own goals (some more realistic than others) and should come together, but each often begins the process oblivious to the other’s needs.
Suppose you’ve owned an auto service station for 30 years. You are tired of all the hassles and have made a lot of money over that time, plus you are in the typical “retirement age” of your 60’s. You also own the real estate and think you should keep it for “retirement income”. A reasonable goal on its own.
After going to market with your friendly M&A advisor, you find the perfect buyer – “young blood”, an excellent mechanic who ran a competitor’s shop for 5 years.
Perfect situation, right?
Then the buyer looks at bank financing and sees that the cash flow of the business is enough to buy the business, but at current interest rates (11% in 2023), not at the price you want. He asks for some heavy seller financing and you balk.
The buyer’s banker says ‘hey, if you buy the real estate, I can package it with the acquisition loan and stretch the term to 30 years” – which makes the cash flow sufficient to cover the loan and a lot closer to the price you want.
‘But what about my rental income?’ you ask. Reasonable question, but your goal of keeping the real estate is in conflict with your goal of avoiding heavy seller financing. Goal vs. goal, as it were.
The buyer is thinking that you are greedy, not listening to his needs and begins to withdraw. But your business is near where he lives, bigger than his current job and will help him achieve his goal of financial independence. He is not listening to your goal of retirement income, but risks losing his big life goal.
As the seller, if you sell the real estate you are giving up the future rental income, while gaining significant immediate capital from the sale. You are also reducing risk of the buyer not paying back all the seller financing (in truth, many deals require some seller financing).
Of course, you will face higher capital gains taxes, the larger the transaction.
The buyer’s CPA asks to speak with your CPA and they come up with some ideas that will mitigate your risk and still provide you with retirement income.
(I’m saving some ideas on that for another post).
Bottom line: talking to trusted advisors, can help you assess your goals/needs versus the buyers goals/needs to arrive at a win-win deal.
Cue the champagne!
