• No down payment is required for the loan (although the seller can require a down payment from the buyer).
• There is no artificial limit on the loan amount such as exist with bank financing.
• The loan is interest-only at rates lower than typical market rates (currently 7%).
• The loan need never be paid back (it’s non-callable) because the lender requires that life insurance be taken out on the seller. (The insurance is collateral for the loan and after death the loan is repaid from tax-free insurance proceeds).
• All loan proceeds are invested in tax-free (not tax deferred) investments with over a 10% historical average return
• All withdrawals from investment accounts are tax-free (but are limited to amounts in excess of the loan balance).
• The heirs receive income-tax-free inheritances.
• The value of the business or professional practice can be made exempt from the claims of creditors because the lender can place first priority on the value of the business or practice equity.
• The implications of this in the context of business succession planning are unprecedented. There is no longer a need to find outside financing. You can sell your business or practice to a young manager or professional who is able to make the business or practice successful, regardless of his or her capital or borrowing capacity. Neither the buyer’s assets nor the business or practice’s assets need to be collateralized for the sale.

Finding a buyer is very easy

Because the EquityAccess program means a business owner or professional practice owner can sell his or her medical practice to any interested manager or practitioner, including one with no capital and no borrowing capacity, it is easier to both find a buyer and to close the sale. It is a way to sell to an interested buyer who might not otherwise qualify for a conventional business acquisition loan.

Setting the purchase price

In some situations, using EquityAccess may be the only way a business owner or prectice owner can sell for the highest possible purchase price, under ideal terms in the shortest period of time. In advance of a sale, the seller acquires the loan that will finance the sale, thereby monetizing the value of the business equity. Thus it is similar to a reverse mortgage on a home. Your non-liquid asset is made liquid, so you can let it work to provide you financial security during retirement. Typically the upper limit on the sales price is one-times the annual revenues (not collections) of the business or professional practice. This is much higher than the usual sales price.

Interest-only Loan Need Never be Repaid

In an EquityAccess transaction, the loan never needs to be paid back, although the interest must be paid each year. The seller can have the buyer repay the loan as the condition of the purchase. In fact, the seller is in complete control of determining the amount and timing of purchase payments made to him by the buyer. It can be a low or no downpayment purchase. The seller can delay down payments and/or spread them over a period of years. The seller can also require the buyer to pay only loan interest for the first few years, and then principal also after that. (Exact timing of payments is based on the buyer’s current and future ability to pay off the loan.)

No Business or Personal Assets are Used as Collateral

It is important to understand that no business assets and no personal assets of the buyer need to be used as collateral in an EquityAccess transaction. This makes more capital available to operate the business or practice, which is very important to the future success of the business or practice. The only collateral for the loan is the investment/insurance contract with the lending insurance company. This contract also provides protection from the claims of creditors and provides tax-free retirement income as well.

Sale Proceeds are Insured Against Loss

The proceeds of the loan are invested in tax-free insured investments, which are both guaranteed against loss and indexed to stock market gains or fixed rates (currently 5.2%). Because investments can earn stock market returns with no risk of loss, they have earned a historical rate of return in excess of 10%. This means that the seller (and his or her family) are protected and have more security available than under other types of business sale transactions.

Sale Proceeds are Not Subject to Income Taxes

It is also important to understand that the sale can be structured to be income tax-free to the seller. Thus the investment accounts not only earn tax-free interest, but the amount invested is the full pre-tax value of the business or practice. This value is set by the seller, and because of the special loan terms, the buyer is willing to pay more than in a normal sale. Thus the seller receives both a higher price, and a much higher net amount, after taxes, than in a normal business sale. This program has the most appeal in situations where the seller is willing to forego a cash transaction in order to receive higher after-tax wealth. This program is especially useful where there is an interested buyer who really wants the business (ie. management buyout), or practice but is unable to come up with the cash and the financing to pay the current owner what the business or practice is really worth.

Circular 230 notice: In accordance with Treasury Regulations which became applicable as of June 20, 2005, please note that any tax advice given herein (and in any attachments) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of (1) avoiding tax penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

 

 

 

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