Should NOT Ask for All Cash
IF A SELLER
DOES TAKE BACK FINANCING, THEY SHOULD:
- Determine the creditworthiness
of the buyer (a Financial Statement is a must, even a credit report)
- Determine if the buyer is qualified to manage the business
- Require the buyer to put down a sizeable down payment (at least 30%).
With this percentage of down payment, the buyer will now have a substantial
vested interest in managing the company and effectively protect his or her
- Require the buyer to repay the balance over a period of up to five years,
but no more than 7 years. If real estate is involved, a longer payback period
may be warranted. A balloon payment provision should also be considered
to shorten the final payback period to the seller.
- Require the buyer to personally sign a promissory judgment note for the
balance owed (a spouses signature would be preferred and would further protect
the seller but this is not always easily accomplished.)
- File UCC Security Agreements to protect the seller’s interest in
the business and assets sold to the buyer.
- Require the buyer to provide the seller with monthly or quarterly financial
statements and annual tax returns of the business. This will permit the
seller to regularly monitor the financial health of the business and spot
any potential problems before they occur.
- Make sure the buyer’s promissory judgment note contains a confession
of judgment clause along with a hefty default penalty provision and the
inclusion of attorney’s collection fees in the event of default.