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how to insure note is paid when sold business

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boston09

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when you sell your pizza shop, most sellers agree to some financing (around 50% of price - not always, but i d say its common practice in my area), or at least thats what i have in my mind. My question is - how do you make sure (legally) that note is paid? i know you should have conditional assigment of lease in case buyer fails on note, ucc filings and you obviously structure legal paperwork so that you do have a case, but could someone deliberate on exactly what must be included (what legal tools, legal language) to insure that not only you can bring case to court if note is not paid, but win it fast, and not let new unsuccessful owner run the place into dump, or acquire sufficient debt with provision companies, irs ect and take equipment with him on his way out. I do realize that its not likely to face this worst case scenario if you take your time and find the right buyer, but still, lets say i dont mind selling with 30% down - thats when legal paperwork should be topnotch. what legal tools will topnotch note document must include? i think we ve all heard stories of new owners not paying their notes and then legal battle for next year or two between seller and buyer, which costs both parties big amounts in legal fees.
 
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POTM has it exactly right. This is what your attorney is paid for. Make sure the attorney you hire specializes in business law. i.e. not the same guy you hire for divorce, DUI… whatever.

Your initial deal with the buyer should include a statement to the effect that a security agreement secured by the business assets, lease, DBA etc will part of the deal. If you are using a qualified business broker this should not be news to them and you can take a detailed offer or letter of intent to the attorney to create a contract. If you are using a real estate broker or no broker at all, you should bring an attorney into the process as soon as you have an interested buyer.

From what I have seen, one of the imporant elements is time. i.e. how long can the buyer be in default on payment to you, the lease or any tax obligation before the seller can trigger the repo clause. Shorter is better.

BTW, the landlord, bank or other lender will like this aspect of the deal. They would much prefer that a previous successful operator retake the business than have to take possesion and liquidate.

The landlord will probably want you to stay on the lease. This is fine as long as a lease default triggers a reposession. You should insist on getting out of that role once the buisness is paid off though.
 
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Sometimes there is a big upside in taking a business back…Especially if everything paid to date is forfeited…But need to make sure the agreement is very carefully drafted to protect your interests…
 
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Be the first to file your UCC, and you beat out everyone but the tax man in repo/collateral seizure.

I ehco what POTM and Steve said. Your attorney is the absolute best use of money in the sale of the business. A good one with experience will protect you quite well.
 
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guys, i hear you about getting the best lawyer, but i am not the type who blindly trusts lawyers, i like to go over paperwork, and insist on some provisions to be included, and it has been my experience that you must stay on top of them. thats why i am asking for specifics here… Royce, what do you mean it can be beneficial? - you mean in the unlikely scenario, when loan is almost paid up and suddenly they fail on it at the end?
 
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It is pretty rare for a buyer to default near the end of the payments. If they can make it for several years, they do not generally drop the ball on the 2 yard line.

What is more common is for a buyer to put 50% down and default a year later with several years to go. If, for example, you sold a place for 300K with 150K down and a five year note for 150K and the buyer defaults after the first year having made only a few payments you take the place back, stand it up and sell it again… keeping the 150K. It might cost you some headaches and 50K to get it put together again, but I have seen some places do this 2-3 times.
 
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Not sure if I would use the word “unlikely” these days…I think there will be more failures than successes in the current climate…
 
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could the deal be structured that the place is sort of rented out for first year and then sale agreement kicks in if payments made on time or could business assets not be included in original purchase agreement but only rented - so allocate almost entire price towards good will, and only rent the equipment say for next year, and after say 1 or 2 years of successful note payments the equipment gets transferred to new buyer for a nominal fee? the objective here is to have the comfort of at least in case of failure is to come in and take all of equipment at same time forcing new owner to stop operating which is more desirable to me than him keep operating recruiring debt. also any thoughts on how to find a lawyer who has gone thru such experience in his career? (and not just somebody who practices business law)
 
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