It’s the first snow of the season, and as I look ahead to the holidays, I want to talk about something that might make a great gift for yourself this year — an exit plan for Christmas.
Most business owners think “exit planning” just means selling their business.
In reality, selling is only one possible outcome.
True exit planning is about understanding your personal finances, your business readiness, and your options — long before you decide to sell.
When selling a business, most entrepreneurs focus on securing the highest possible price at closing. However, as one seasoned business owner demonstrated, seller financing can sometimes be the smartest financial move—benefiting both the buyer and the seller.https://youtu.be/rkdB8eLl6Xw
The Challenge: Selling a Business with Excess Land
As a business broker, I encountered a unique challenge: a business for sale that included over 100 acres of land. The problem? Only a small portion of the land was essential for business operations, meaning that the additional acreage inflated the asking price without contributing to the company's cash flow.
The seller, a 78-year-old entrepreneur, had dedicated his life to building the business but had little in the way of retirement savings. While he owned his home, he also carried some personally guaranteed business debts.
The Offer and an Unexpected Counteroffer
A potential buyer made an offer of $350,000, requesting the seller to finance half the amount ($175,000). But instead of simply accepting or declining, the seller countered with a surprising proposal: he would sell the business for $450,000, requiring only $100,000 down while financing $350,000 over 10 years at an incredibly low 2% interest rate.
This strategy was highly unconventional—typically, sellers aim to finance less, not more. However, the low interest rate made the deal irresistible to the buyer. Initially planning to cap his offer at $400,000, the buyer realized that with seller financing at just 2%, this deal was more affordable than traditional bank financing. The transaction was finalized.
The Seller’s Smart Retirement Strategy
After closing the deal, the seller explained his reasoning:
Steady Retirement Income – Instead of receiving a lump sum that would earn less than 1% in a savings account, he secured a structured income stream over the next decade.
Low-Risk Financing – The business’s valuable land, equipment, and buildings served as collateral, making the note relatively secure.
A True Win-Win – The buyer gained affordable financing, while the seller effectively transformed his business sale into a reliable retirement annuity.
The Power of Creative Seller Financing
This deal highlights an important lesson: creative financing options can be mutually beneficial. If you’re considering buying or selling a business, understanding seller financing can lead to better outcomes for all parties involved.
This is a common question I receive, especially from people in the U.S. where there are options to use 401(k) savings for financing a business acquisition. While it may seem like a great way to avoid borrowing from a bank or paying high-interest rates, the risks are significant, and it’s essential to understand the implications. https://youtu.be/37t2lK1lZ_w
Using Retirement Funds in the U.S.
In the U.S., there's a legal structure known as Rollovers as Business Startups (ROBS), where you can use your 401(k) savings to invest in a new business. Here's how it works:
You set up a new entity to buy the business.
Your new entity starts its own 401(k) plan.
You transfer your existing 401(k) funds into the new company's plan.
As the new company’s controller, you can direct the 401(k) to invest in the business.
While it sounds simple, it's legally complex, and there are companies that specialize in managing this process to ensure you comply with tax laws. However, failure to meet all legal and tax obligations could result in penalties, such as having the transferred retirement funds treated as taxable income.
The Risk to Your Retirement
When clients ask if they should use their 401(k) to buy a business, I ask them a critical question: If the business fails, do you still plan to retire? This money is meant for your retirement, and the failure rate of small businesses is high. Using these funds could jeopardize your financial future, not just your present situation.
The Accountability Problem
Many people are drawn to this idea because they think that by avoiding interest payments to a bank, they’ll save money. However, you should hold yourself to the same standards a bank would when lending money.
If you use retirement funds, you must ensure that the business is producing a rate of return similar to what the bank would expect for such a loan. This means you should be disciplined enough to repay your retirement account with interest, as you would with any other loan. The issue is, most people aren't as strict with themselves as a bank would be.
A Possible Exception: Secured Lending
One scenario where I can see using retirement funds making more sense is if you lend the money from your retirement account as if you were the bank. For example:
Let’s say you’re buying a small business and need a loan for a vehicle. Instead of borrowing from the bank at an 8% interest rate, your retirement account could lend the money to the small business, secured by that vehicle.
If the small business fails, your retirement account, holding a secured lien, can repossess the vehicle and recoup its investment. This way, you treat your retirement fund the same way a bank would, ensuring it’s protected.
I have no idea how to set this up, you’d have to get tax and legal advice.
Consider Your BATNA
Your decision ultimately depends on your Best Alternative to a Negotiated Agreement (BATNA). If you have other opportunities—like employment or alternative investments—you should weigh those before risking your retirement savings. In cases where you have no other options, using retirement funds might feel necessary, but I caution against it unless you're sure you can protect that investment as a bank would.
Final Thought: Retirement Money Should Be for Retirement
At the end of the day, your retirement funds are meant to ensure a comfortable future. Using them for a small business acquisition puts that future at risk. Unless you're confident in securing those funds properly, it’s often wiser to leave them untouched and explore other financing options for the small business.
If you’re interested in exploring small business buying, selling, sign up to my email list https://www.DavidCBarnettList.com to keep you updated whenever we post new videos and content.
