If you're angling to buy a business but can't meet the seller's price, there may be a way to structure a transaction that makes everyone happy. Consider using a "covenant not to compete." Here's how it works:
Say the seller wants a total of $5 million when he gets ready to sell his business. Offer him $4 million for the business and, in addition, $1 million in a covenant not to compete (a legal agreement that keeps him from selling the same products in the same market area for a specified number of years). The advantage is that the covenant is a deductible expense. (Typically, it can be amortized over five years.) If you want further deductions, consider giving the seller a multiyear consulting contract for services rendered, the cost of which can be treated as a deductible expense.
"In the wake of the tax reforms of 1986, these are among the most attractive tools left for taking a write-off on the money paid out for buying a business," says R. Paul Sprague, CEO of Warwick Group, a New York City investment-banking firm. -- Bruce G. Posner