|The Importance of Obtaining Seller Financing |
by MATT BROTHERS
Often, when a business is purchased there is no need for Seller financing for any portion of the purchase price. The purchaser may have adequate funds or bank financing with which to purchase the business and has no need to request seller financing. However, it often makes sense to request the Seller finance a portion of the purchase price for several reasons:
· It keeps the seller in the game. Purchase agreements will generally require a seller or seller shareholder to perform training and transition assistance, which might include an introduction to customers and suppliers. If the seller knows that final payment of the purchase price depends upon the success of the purchased business, seller is far more likely to do everything necessary to make certain that the business is successful.
· A “set-off” or hold-back provision in a promissory note gives some security for unknowns. An example would be a situation where a key supplier, after closing, informs a purchaser that seller still owed back invoices. If the business transaction was an asset purchase sale, the purchaser would have no liability to the supplier for those past due amounts. However, if the supplier is a key supplier and a good relationship with that supplier is integral to the business, the purchaser may wish to pay those past due invoices to maintain good relations with the supplier. Any amounts paid by the purchaser to the supplier could, if a promissory note is drafted correctly, be “set-off” from sums owed to the purchaser pursuant to the promissory note.
· A “set-off” or hold-back provision in a promissory note gives some security for seller breaches of seller’s warranties, covenants and representations. In the event a seller has misrepresented certain things in a purchase agreement (for example, falsified financials or representations concerning the status of the business), damages incurred by the purchaser as a result of the misrepresentations can be set off from sums owed to the purchaser, provided that the promissory note is drafted correctly.
· A promissory note that provides for payments over a period of time that is equal to any non-compete period provides additional assurance that the seller or seller shareholders will not open a competing business, resulting in damage to the purchaser’s business.
One thing to remember is that when a seller is paid the entire purchase price for a business at Closing, the seller is “gone.” Seller has no continuing incentive to assist the purchaser or remain accountable to the purchaser. While requiring seller financing is just one piece of the puzzle of acquiring and maintaining a successful business, it is one that should be seriously considered by any purchaser.