Buying a Business – Installment Sale

An installment sale is defined by the Internal Revenue Service in Publication 537 as the sale of a business or property in which at least one payment is received after the tax year of the sale.

An installment sale is a form of seller financing where the seller bears the risk of buyer default while the buyer preserves their most precious asset (cash) and pays for the business over time.

There is rarely any argument that an installment sale heavily favors a business buyer. However, there are a few small benefits to the seller that should be noted. For all intents and purposes, the seller serves as the bank in an installment sale transaction. As with any bank or third party lending institution, the seller will require interest payments from the buyer in return for allowing access to their cash. The interest revenue received in excess of the principle increases the total compensation to the seller. However, the interest received is taxed at ordinary income rates while the taxable gain on the principle receives preferential capital gains treatment (at the personal level).

Another slight benefit to the business seller is the tax benefit of receiving the purchase price over time rather than in one lump sum. Since the US tax system is progressive (the higher your income in an individual year, the higher the tax rate or “bracket”) and the purchase price is taxed in the year received, receiving the proceeds over several tax years typically lowers the seller’s total effective tax rate. The downside however is the offsetting opportunity cost arising from not receiving full payment at the time of sale, incurring the higher tax, and investing the net proceeds. The seller must consider the risk profile and rates of return on other investments as an alternative to their investment in the buyer of the business. The seller must consider their entire portfolio and/or their potential portfolio before making this investment in the buyer. As always, the best portfolio will be the one that minimizes total investment risk while maximizing total investment returns.

Typically it is not the potential rate of return on an installment sale that makes it unpalatable but rather the high risk of buyer default. If only there were ways to shift some of the default risk back to the buyer..

We’ll discuss these strategies in our next post.

How To Invest Properly To Keep Your Business Growing

Investing for a business can have varied meanings. You have probably heard the term investing in your future. Investing in your future to businesses may pertain to the amount of investments necessary to keep the business running and headed towards a profit.

Often businesses need to invest in products for their company to help insure proper growth of the company. For instance, upgrading computer systems may cost a lot of funds however having access to better computer programs is an investment. Computer programs that are current can allow the company to track spending, manage inventory and process information. By upgrading the computer systems the company is improving and therefore investing in their future.

Investing for a business can also mean investing in the customer. Every day the business strives to please their customers. By striving to gain and keep customers companies are using a form of investment. Investing in your customer is a key to a successful business. Without care and effort customers can easily leave and find another business to fit their needs. It is one of the challenging aspects of running a business, knowing when and how to properly invest in your customers. Some of the ways a business may invest in customers may be to strive hard through advertising.

Advertising aggressively is a way to try and bring in more customers for a business. Another way companies invest in customers is by aiming to have the best service available. Businesses must try hard to create a service environment for their customers. Through insuring customers feel well cared for within the company regardless of the product or service sold can go a long ways towards pleasing the customer and therefore your investments.

Another key to investments in a company refers to capital versus dept. Like many individuals companies often have to borrow money in order to buy products or services to keep their business running well. Borrowing funds is a common practice for a business. The key however is insuring that the debt is kept well under the amount of capital a business has or produces. By reducing dept you are investing back into the business. Financing from banks is to be determined as short term or long term depending on the length of time need to repay the banking institution.

Investing in your company is the only way your business can grow and profit. Through the investments in time, labor, customers or funds businesses are able to determine the amount of involvement and value of a company. Whether you are investing in your future is completely within the businesses control. Finding the best way to invest in the future of your business or company will insure long term success.

Tips On Deciding On What To Invest In With Your Real Estate Investing Business

Getting your foot in the door of any new business venture can be difficult. Real estate investing can be confusing because you have so many options. It pays to investigate these options and learn as much as you can about the variety of real estate investments because it will help you make good choices. Sometimes just learning the jargon that is commonly used in real estate investment circles will give you the confidence you need to get going. What follows is a brief description of common real estate investment choices you will have. Knowing the difference between these conditions can help you decide on your investment.

A “fixer-upper” is a home that is valuable because of its location or special features, but requires some substantial work before selling. This kind of effort involves more than just a coat of paint or other cosmetic changes. A fixer-upper will usually need structural, plumbing or electrical repairs — maybe all three! Know that you will need to make a financial investment into this home before you can sell or rent it out. Still, if the home is unique in some way or is in a very desirable area, it may be more than worth your time and money to invest in it.

On the other hand, a “makeover” is a house whose value increases by mere cosmetic changes — perhaps a new siding or a coat of paint on the outside to make it more attractive to passers-by will do the trick.; perhaps some new carpeting or paint inside. A makeover is simply a very structurally sound house that may have an outdated d├ęcor or a worn look about it. This kind of real estate investment can give you a good solid return for the money.

Obviously, this is a very simplified look at the many options you have, but it helps to illustrate two basic choices you need to consider when investing in real estate. Remember that there are many ways to succeed in this business, so keep your mind open to new ideas and reevaluate your strategy every now and again. As time goes on, you will find your niche in the real estate business and develop an expertise that will give you an edge in certain areas of the market. As your knowledge about the real estate investing grows, your real estate business will grow!