AboutDavid K. Staub Expertise I am a business and tax attorney and have spent more than 30 years assisting people in buying, selling, merging and spinning off businesses. I can answer questions on the mergers and acquisitions process and the related legal issues, in general. Topics can include structuring the transaction, negotiating the deal, conducting due diligence, and more. I can also guide people to find sources for answers to specific legal questions which cannot be answered in a forum of this nature.
Experience
Experience in the area I have been an Illinois business attorney for almost 30 years. I have an extensive practice in the mergers and acquisitions area and have been involved in the tax and legal issues on hundreds of business transactions.
Organizations Illinois State Bar Association;
Chicago Bar Association (former Chairman of the Corporation & Business Law Committee and former Chairman of the Mergers and Acquisitions Subcommittee; former Executive Committee member, Federal Tax Committee and Chairman of subcommittee on general tax issues); Glenkirk Foundation (Trustee; Vice-Chairman/Strategic Planning); Association for Corporate Growth, Chicago Chapter; Midwest Entrepreneur Forum; Midwest Association of Alpha Delta Phi - President
Publications Commerce Magazine; YLS Journal; ISBA Section of Taxation Newsletter
Education/Credentials Harvard Law School, J.D., 1977; University of Illinois, B.S. in Accounting, with highest honors, 1974
Disclaimer Responses are intended to be informational only. No response is intended to constitute legal advice or create an attorney-client relationship. Online advice is not a substitute for consultation with an attorney.
Question Selling insurance agencies in Ohio which will require some seller financing to close. I have been the buyer utilizing this method so have experience with the process. My question is what interest rate to charge in such a situation (carrying 50%)? Looking at a 7 to 10 year term.
Answer Every deal is different, but my view on seller financing (at least when I am representing the seller) is that the rate should be high enough to encourage the buyer to pay it off before paying down conventional debt. That means it is a pretty high rate of return.
For purely psychological reasons, sellers often want to get a higher price for their business and are willing to finance the sale at an interest rate below market rates so that they can say they sold the business for X. From a tax standpoint, that also makes sense, as long as the rate is above the IRS' applicable federal rate (currently hovering around 3%). The profit on the sale of the business is typically taxed at capital gains rates while the interest is taxable at ordinary rates. That makes good sense.
The problem is that the seller-financed debt is usually either unsecured or deeply subordinated. That means it is very risky. The typical below market interest rate on seller financing means that there is no incentive to ever pay the loan down faster than absolutely required. Why pay down debt with a 5% interest rate when your bank debt is at 7%? In fact, even if you have no bank debt but you have a line of credit available at 7%, why would you even use excess cash to pay down 5% when next month you might need to tap the line.
Of course, if you are very certain of payment and consider the buyer a very good risk, perhaps because of other assets and/or a personal guaranty, then a lower rate can be justified.
Personally, in this market, I would be looking for a minimum of 8% on almost any seller financing and more if I felt that the risk of a buyer default was greater.
