All jokes aside, when you sell your business the purchase price is usually paid in three ways.
First there’s the down payment that is made during the initial signing of the agreement, usually called the escrow, the earnest money, the deposit, whatever you want to call it. Usually 1%-10% of the deal price.
Secondly, there will be a cash portion, paid a closing to the Seller. Again, no real issues here.
Lastly, however, there is the Promissory Note. It’s a loan the Seller is giving the Buyer, and is paid monthly to the Seller for months or years, with interest. But, here’s the rub: what if they don’t pay?
If the Buyer stops paying on the Promissory Note, how can the Seller protect themselves?
Turns out, there are a number of ways a Seller can protect themselves, and here’s a list:
Personal Guaranty. Personal Guaranty’s are great in the commercial context. They allow the Seller to go after the Person’s personal assets if their business stops paying on the Note. But, keeping in mind that I practice in Florida, Florida protects a lot of personal assets. Your main home, one vehicle, retirement accounts are all protected from liens and levies (the tools used to get that Note paid). One tip – always get the spouse to also sign the guaranty, and if they balk at having their spouse sign it, there may be collateral there you can secure against with a security agreement (see below) Otherwise, unless they have other assets, there’s not a lot to go after in Florida.
Security Agreements. With every Note, you should have a security agreement which secures the assets of the business for repayment of the Note. If they cannot pay the Note, you can take all of the assets back and sell them, or do with them what you like. This works out if there are assets in the business worth having, but if there aren’t any assets worth having what’s the point?
Pledge Agreement. These are interesting agreements. They state, if the Buyer doesn’t pay, you get to take their business and own it. There is a transfer of the ownership (stock or membership interest) to the Seller and now the Seller owns the business again and can sell it again if they want. But, sometimes the Seller doesn’t really want the business back, they just want their money.
Seller’s Due Diligence. Which, brings me to conducting Seller’s due diligence. Anytime a Note is involved the Seller always has the right to look into the Buyer and determine their credit worthiness. Do they have a 500 credit score? If they do, are you going to lend them $100,000? Probably not, unless they have some sort of collateral they are will to put up. Remember, they are not going to offer up collateral for their loan. SELLER needs to get in there and look into the Buyer as the Buyer is looking into the business.
In conclusion, a Seller should always get a Security Agreement, Pledge Agreement, and Personal Guaranty from each owner and their spouse of the Buyer when they provide a Note when they sell their business. A bank would get nothing less.
If you need help with the above, don’t hesitate to contact me, Frank Lago, Esq., Tampa Bay Business Attorney for Bay Area Corporate Counsel, located at 4830 W. Kennedy Blvd, Ste 600, Tampa, FL 33602 855.521.2222 Frank@BayAreaCorporateCounsel.com