Structuring Owner Carry Notes When Selling A Business
Due to the current state of the Credit Markets and Bank Financing, Seller financing is more important then ever in facilitating the actual close of escrow in a Business Sale. Everyone is aware of the difficulties in procuring financing on small businesses these days. Everything must be perfect. At one point a few years ago I think I could have gotten my family dog a loan. Today worthy buyers are still getting rejected. The bail out has not reached Main Street.
Therefore Sellers need to structure their notes properly to secure themselves as safely as possible. There are several factors to consider when carrying a Note. First of all the Seller needs to be realistic in terms of what the business can support in form of a monthly payment. No one knows this better then the Owner who has been operating the subject business. If the business has a monthly adjusted net income or owner benefit of $5,000.00, you can not receive a $5,000.00 monthly payment. The Buyer will expect the business profits to make the payment and leave him some money too. Don't set your Buyer up for failure.
Now to make the Sellers note as "tight as possible", the following terms should be incorporated into the note:
Late Fee: Typical notes will begin having the first payment due 30 days from the close of escrow. A typical Late Fee clause is 10 days from due date and a penalty of 6% of the monthly payment. Personally I like 10 days and 10%. In my 28 years of experience in selling businesses, I've found out that if a Buyer is late once and I remind them of the 10% late fee they will do everything possible to not incur it again.
Collateral: Typically the business assets are collateral for the note. In this case there needs to be a written Security Agreement attached to the note. Most escrow companies will supply the Security Agreement. Read it. Not all are created equal. A good one will require the note holder's (Seller's) consent to transfer the note and note holder's consent to substitute or replace any items of collateral (equipment) with like or comparable collateral. A list of equipment is necessary to be attached to the note and security agreement as these items are part of the Sellers overall collateral. All Security Agreements should also define a Breach so that enforcement of the Note and Security Agreement are "cut and dry'.
UCC-1 Financing Statement: This instrument perfects your note by registering it with the California Secretary of State. Make sure it is listed on the UCC-1 that "all fixtures and equipment are collateral, along with all inventories, cash, receivables, deposits and any other tangible asset that the subject business may have.
Reassignment of Lease as Collateral Security: This is one of the more important items and least known of for securing your note. This is a separate document. I used it all the time in the "old days" before all that loose bank financing and all cash deals. It's very important this document be signed by the Buyer, Seller and Landlord.
In the sale of the business you are obtaining an Assignment of Lease to the Buyer from Seller. In that document the Seller is transferring all of his interest in the lease to the Buyer. If a Buyer were to default on the note, the Seller has to go back through the Landlord in getting possession of the business.
In a "Reassignment of Lease as Collateral Security" the Buyer and Landlord acknowledge that in the event a Buyer defaults on either the rent or note payment, the lease shall revert back to the Seller. The Seller gets the Landlord's and Buyer's consent to take back the premises up front before ever giving possession to the Buyer. Seizing your assets from the Buyer on a Default of the Note does not give you back possession of the Premise. This agreement terminates upon payment in full of the Sellers' Note.
The more complete your note is the more successful you will be in collecting all of your payments. These items also give higher value to your note should you decide to sell it on the open market after closing escrow. I would like to share selling notes with you soon.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Helen Yoo, New Century Escrow - Escrow Services In Southern California
New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
|William F. Ziprick, Attorney: Legal Services For Buyers And Sellers
Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.
|Shalonda Chappel: Escrow & Bulk Sale Services - Southern California
Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.
|Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA
California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.
|Chuck Post: Laundry Buyer Representation, Consulting, Due Diligence
32 years experience in the laundry industry, specializing in assisting laundry buyers with buying or starting up, re-tooling, laundries in Southern CA. Laundry buyer representation, consulting, due-diligence, lease negotiations, laundry valuations. Call 619-227-5711 (Cell).
|Joanne Weber, Broker: Preschool Specialist, Southern California
The Ryan Craig Company is in its 46th year as the recognized expert in Southern California, dealing exclusively in the sale of preschools, Montessori schools, day care centers, and private schools. Our extensive list of references speaks for itself. Phone Joanne at 818-760-3684 for more info.
|Mike Brewer: Liquor License Broker, ABC Consulting Service
Liquor license brokerage and consulting services. We provide: Alcohol License Transfers Application Consulting & Processing, Liquor License Purchases & Sales, City Zoning Permits & Land Use Entitlements, Public Convenience or Necessity Findings and Letters. Phone Mike Brewer direct at 800-437-1100.
|Rick Carlson, Business Broker - Southern California
You Will Never Feel Lost In The Shuffle. Many Brokers Simply Send Out An NDA And That's The End Of Communication. All Buyers Receive A Personal Meeting With An Ace Acquisition Specialist So They Can Recommend The Perfect Business For You. Phone Rick direct at 800-985-4939.
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