The turbo-charged “Reverse Mortgage” for businesses.
EquityAccess was designed to give business owners the ability to leverage their equity, reduce taxes, and protect their business assets from litigious trial attorneys and runaway juries.
Frequently Asked Questions
1. How does the program benefit the person (such as a young professional) who wants to buy the business or a professional practice? How does it benefit the seller?
The program benefits the buyer because he or she does not need to have any cash upfront, unless the seller demands it as a downpayment to complete the sale. The buyer does not need to borrow any money to make the purchase, since the seller has already done that. The buyer is paying on favorable terms – lower than market interest rates, for example.
The seller benefits by being able to sell in a way to save most of the taxes otherwise payable on the sale of a business, by being able to finance a good buyer who does not have the financial ability to buy the business himself, and by being able to set the purchase price. In addition, the sales proceeds are invested in a way that all interest is tax free, and the value of the business is protected from lawsuits and other creditors.
2. What facts must exist to make this a viable plan, i.e., legal structure, size of the practice, # of professionals in the practice, age of the seller and buyer, etc. etc.?
Generally speaking it is not feasible to do a loan for more than one times the billed revenue of the business (or the partner) for the year. Also, the seller must be in good enough health to qualify for the life insurance coverage built into the contract with AIG. The seller must also be willing to forego a lump sum settlement at sale. That is, he or she must be willing to get paid over time, as in an installment sale. It is expected that the tax benefits and the establishment of a higher sales price will offset this disadvantage.
3. Must the buyer have assets to use for a downpayment? Must the buyer have excellent credit? A certain net worth?
The Simple Answer is “No.” The buyer must meet the criteria set by the seller, not the criteria set by a bank or other outside lender. The seller takes the risk that the buyer will not perform under the sales agreement. If the buyer stops making loan payments then he or she forfeits their equity and the business reverts to the seller.
4. How does the valuation affect the transaction? Who does the valuation? Must the seller and buyer agree on a valuation?
The loan and collateral transaction with the business owner and AIG is separate and distinct from the business sale transaction. The business is not collateral for the loan. Thus there does not need to be a formal business valuation for loan purposes,, although it is recommended to establish a sales price. The seller and buyer will need to agree on the sales price and all the details of the timings and amounts of payments.
5. Must the younger professional be taken into the practice before the transaction is completed? Does it matter if he’s an employee, a partner, or a shareholder in a professional corporation?
The simple answer is “No” because the seller can sell whenever he or she wants to sell, and can also sell just a portion of the practice/business. Form of legal entity doesn’t technically matter, although it may impact the tax consequences. Check with your tax advisor.
6. What risks are there for buyer and seller? What is a “worst case scenario” and what is the downside?
The seller has the risk that the interest rate tied to stock market indices will not perform well over time, although he can get a fixed interest rate (currently 5.3%) also.
The seller has the risk that the buyer will walk away from the transaction and not finish making payments and the business will revert to the seller. The buyer in this case risks losing the equity he or she has built up, i.e., if business reverts to the seller.
7. How does the ARLIS transaction chart differ in a practice buyout scenario? Do details of the loan materially change?
No, the details of the loan don’t change. But the loan repayment schedule may change in practice. The sale may be conditioned on the buyer taking over the loan repayments, both interest and principal. The seller can ask for more than the loan, or less, and can also ask for cash upfront or cash paid over a period of years in addition to the loan payments he makes.
8. How do the cash flows work, and how are the buyer and seller’s cash flows impacted in future years after the transaction occurs?
The seller does not walk away from the transaction with a lump sum of cash. Thus it is in effect an installment sale. Details are agreed upon by the parties. The buyer’s cash flow generally is expected to be met through the revenues generated by the business. Thus it is important that the cash flows generated are sufficient.
9. What are the restrictions on withdrawals of cash values by the owner/seller?
The owner cannot withdraw more than the amount of the cash value that exceeds the initial loan amount. The interest on the loan must be paid each year.
10. Does the owner/seller have flexibility on the amount and timing of distributions?
The owner may withdraw any amount he or she wishes to withdraw at any time, subject to the limitations in #9 above (the net amount above the original loan value).
11. How is EquityAccess used to facilitate the buyout of a minority shareholder or partner?
The business with the minority shareholder or partner may set up an Equity Access program based on the life of the minority owner). The business agrees to make interest and principal payments on the premium loan in exchange for the minority owner transferring ownership of his or her minority interest in the business. The selling minority owner then receives a tax-favored asset in exchange for the sale of the business interest.
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.