When you decide to sell your business, you’re not thinking about buying a new home or a vacation home. Buying a home would not be one of the first things on your prep list for the sale of your business. But planning ahead and knowing what you need to do will help you when the time comes.
You may sell your business and wind up with a substantial amount of cash and liquidity and feel that a mortgage is not necessary. Typically, when you have a substantial net worth, keeping your money is a better bet in terms of ROI (return on investment) than having dead equity in the property. If you want to tap into the property’s equity down the line you will incur closing costs, so it may be better all the way around to keep your money from the sale and take a mortgage from the start, especially with the new tax laws.
When you’re self-employed, depending on your business structure, the usual setup in terms of income distribution is to usually give yourself a salary and distribute any extra profit (either as a partner or LLC or sub S). Then you have the discretionary “perks” such as health insurance, car leases, travel and entertainment, credit card payments and other personal/business items. From a business buyer’s perspective, not all of the discretionary items will be acceptable in terms of adding back to the income in order to increase the profit and sales price, which of course is negotiable. Terms of seller financing are also negotiable. The important takeaway as the seller is that you must have in mind that mortgage lenders look at consistency, and typically two years is the standard, bar any program exceptions and special underwriting overlays. Once you sell your business, you may walk away with cash or some cash and a note receivable, but typically you need history on a note receivable in order to qualify as income in order to get a mortgage. If buying a property is imminent, you want to structure a financial situation that maintains your self-employment history. So what are some of the options for a person looking to sell their business in order to obtain a mortgage financing upon the sale and final closing of their business?
1) If it is a stock sale, stay as an employee rather than a consultant. If you have paid yourself as a w-2 previously, you maintain that history, but if you become a consultant paid on a 1099, you have set your clock back two years because lenders want to see a two-year self-employment history. 2) If it is an asset sale, the buyer will most likely set up a new corporation and move the assets into that new corporation, allowing you to maintain your current corporate structure. You can then see if the new owner will pay the old corporation as a consultant. This allows you to keep the integrity of the history of the company and bypass the two-year self-employment history.
In summary, it may be best to arrange to stay on as an employee and keep your current benefits, but structure salary enough to qualify you for the mortgage financing you may be looking for down the line. If it is the stock sale, being an employee would be better than being a consultant because as a consultant you would need two years and the new entity in order to qualify the income.
By Carl Edward Guzman
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. He is a real estate mortgage banker and business financing expert with over 28 years’ experience. He currently has 173 five-star reviews on Zillow. Carl and his team will help you get the best mortgage financing for your situation, and his advice will save you thousands! www.greenbackcapital.com [email protected]
