Structured Installment Sale vs. Seller Note

February 03, 2023

by a searcher in Garrison, Philipstown, NY 10524, USA

Hi all,

Has anyone explored using a Structured Installment Sale (SIS) to buy a business? This would be an alternative to a traditional seller note.

As I understand it, the idea of a SIS is that the seller receives the note payments over several years via a highly creditworthy intermediary (e.g. MetLife). The buyer/business, instead of paying the seller P&I directly as in a traditional seller note, pays the intermediary a regular annuity premium and the intermediary pays the seller according to an agreed-upon schedule.

By doing this, the seller avoids large capital gains taxes for the year of the transaction and eliminates the default risk of the buyer since the intermediary has agreed to make the payments as a guaranteed annuity. In essence, the intermediary replaces the buyer's creditworthiness with its own.

Would love to know the pros/cons of this approach. How much this type of instrument typically costs, say compared to a 10/5 amortizing seller note with a normal interest rate (e.g. 8%). Also additional legal, administrative fees, etc. Any general insights would be much appreciated. At first glance, this seems like an appealing option. Thanks!

Reply by a searcher
from London Business School in London, UK

thanks ^redacted‌ in the UK it seems that a deferred consideration is deemed as incurring a liability at the time of the sale since the amount is known‌, however since an earnout it can be viewed differently an interesting article https://claritastax.co.uk/knowledge/earn-outs-and-deferred-consideration/#:~:text=Ascertainable%20deferred%20consideration&text=This%20means%20the%20amount%20to,conditional%20nature%20of%20the%20consideration.
Well i found it interesting, as every speak with a tax lawyer rather than taking the advice of a rando on a message board

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

My understanding of SIS is materially different. Here is my recollection.
SIS is not a tool to help the buyer. It is a tool for the seller to defer CG taxes. Buyer needs to put cash on the table first; seller then can decide to pick it up or have a 3rd party pick it up and then have the 3rd party give it to seller on a pre-determined schedule. Typical cost charged by the 3rd party is, if my memory serves me correct, is 6%. There are issues on R&W that need to be worked out. Seller can use SIS even if there is some Seller Note, earn-out etc.
One can argue that Seller will accept lower price b/c he/she can defer CG taxes. Good luck trying to convince the seller and seller's advisors.
If I remember, SIS works better (or has less headaches) for real estate sale with high CG. I forgot the reasons why.

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