When a business owner in Tennessee is selling a business, there is often a demand that the seller finance some portion of the purchase price. This may be a result of financing institution requirements or lack of purchaser funding. While it is always better for a seller to be paid in full up front, in the event it becomes necessary for a seller to finance the purchase of business, it is imperative that the seller properly secure the purchaser’s payment obligations (and with as much security as possible!). Considerations concerning whether to finance and how to secure the financing would include the following:
- When considering seller financing, determine whether your security interest will be first in line. If there is a large bank loan/security interest that has priority over your security interests, your chances of recovering anything in the event the business fails is negligible.
- If you decided to move ahead with seller financing, a well drafted promissory note providing for adequate interest payments, late payment fees and default provisions is necessary. If possible, the note should provide that the purchaser/borrower is entitled to no set-offs for any reason against sums due under the note. Always consider requesting personal guarantees from individual owners of any corporate entity that may be purchasing the business. Well drafted security agreements (which can prohibit future borrowings and require insurance, etc.) are also necessary, as is a properly filed UCC financing statement.
- Consider the security necessary to secure the notes. Typically a seller note is secured by all assets of the business being sold. If, however, there are few tangible assets of the business (and its value is substantially in the good will), a seller may wish to consider requesting additional security, such as a deed of trust or mortgage on any real property (residential or commercial) owned by the purchaser or the purchaser’s individual owners.
- Consider requiring that the purchaser employ you (seller) or one of the seller’s key members or shareholders. Remember, you built the business and know how to keep it successful. Your continued involvement in the business (for a fee, of course) can only help ensure that the business continues to be a success and that you get paid.
Seller financing can be tricky and in many cases a seller is not paid some or all of the amounts due under a promissory note after closing. While planning and well drafted documents can help to minimize the risks of seller financing, nothing can eliminate those risks, so one of the most important questions you should ask yourself when considering whether to finance a purchaser is “how much am I willing to risk.”