It should be noted that a high percentage of acquisitions use a combination of external ﬁnancing sources and Seller ﬁnancing. Seller ﬁnancing can take the form of a short term (1 year) or a longer term note. Seller ﬁnancing for a portion of the purchase price has the following advantages:
– The interest rate on the loan is often much higher than conservative investments such as certiﬁcate of deposits and government bonds.
– The Seller is taxed in the year the cash is received (less any basis the Seller has in the ﬁrm) with regard to the sale of the ﬁrm. Therefore, the tax liability is spread out over a number of years.
– The Seller will have more of an incentive to work with the Buyer on client retention, employee transition, etc. if the Seller still holds a note from the Buyer.
– Seller notes are usually more ﬂexible than external ﬁnancing. Often the note is structured so a high percentage of the payments are made during tax season so the Buyer can cash ﬂow the practice during the slower revenue months.