This blog series explores the steps involved in buying and selling a business, which tend to be much more complex than many business owners realize. In prior blog posts, I discussed the need to start off with a letter of intent and the intricacies of the due diligence process . In this blog post, I will briefly explore financing options related to a business purchase and sale transaction.
Cash Sale: From a seller’s standpoint, a cash sale is generally ideal. The entire purchase price is paid via a cashier’s check at closing – no fuss, no muss. From a legal standpoint, a cash sale is much more straightforward in terms of the documentation required.
Promissory Note: Often, the purchaser will pay only the agreed to deposit at closing, and the remainder of the purchase price will be secured by a promissory note. The promissory note will set forth in detail the terms of payment including the term of the loan, date the payments are due, applicable rate of interest, governing law and default.
Security Agreement: And speaking of default, if payment is to be made over time, seller will likely require some mechanisms in place to secure payment. One such mechanism is a security agreement. A security agreement generally gives seller a secured interest in relation to the business assets that are being transferred, along with future business assets. In the event that purchaser defaults on the payments, seller can essentially come back in and take over the business. As a follow up to the security agreement, a financing statement is filed with the Washington Department of Licensing.
Stock Pledge Agreement: If the transaction involves a corporate entity sale, the parties may enter into a stock pledge agreement so that the ownership of stock is not officially transferred to the purchaser until the purchase price has been paid in full.
Guaranty Agreement: Finally, assuming that the purchaser of the business is a business entity (corporation, LLC, etc.), some or all of the owners of that business entity may enter into a guaranty agreement with the seller in order to personally guarantee the business’s obligation to pay the purchase price.
If you have any questions on how to structure the financing arrangements in a business purchase and sale transaction, we would happy to assist.