In reviewing purchase/sale agreements for business sale transactions, I see all sorts of agreements with many varying provisions. I recently came upon two provisions in a proposed purchase agreement that would merit the complete attention of any seller. This blog will deal with one of those provisions and my next blog will address the second provision.
Most sale transactions involve a carryback by the seller of some amount, depending on a wide variety of circumstances. In the case at hand, buyer was acquiring all of the LLC ownership interests and offered the sellers cash at close of about 45% of the purchase price with the remaining 55% represented by a secured promissory note. However, the note language provided that the carry-back note would be subordinate to any senior debt obtained from a bank or other commercial financing source up to an amount almost equal to the deferred portion of the purchase price. What that likely means is that the senior lender will require the seller to sign a subordination agreement that will restrict the Seller’s right to receive payments on the deferred note while any monies are owed on the senior debt.
Now everything may turn out just fine. But the seller needs to understand and accept the fact it is conceivable that if the buyer is unsuccessful with the business, the seller may only receive a portion of the subordinated debt or maybe even nothing.
That’s why I always ask sellers at the start of a proposed sale transaction whether they need to sell, are motivated to sell or only want to sell if the deal points are right for them.
My next blog will speak to the guaranty offered by the buyer’s owners in this proposal and how that may not be all it seems to secure the sellers’ unpaid portion of the purchase price.
Michael W. Margrave
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.