In my previous blog, I reviewed the concerns a seller should have when taking back a good chunk of the purchase price of the business in the form of a deferred promissory note when the note provides for subordination to a senior lender with respect to most of the deferred portion. This proposed transaction seems well secured on its face with a pledge of the acquired ownership interests, a security interest in the assets and a guaranty provided by the owners of the purchasing entity.
Sellers should always scrutinize a guaranty document closely for specific terms. If you get a bank loan for your company business, the bank will generally always require personal guarantees of the business owners and spouses. And that is what the proposed buyer provided. But that is where the similarity stopped. A bank guaranty will nearly always allow the bank to proceed directly against the guarantors without first having to proceed against the debtor company. But in the document presented with this proposed purchase transaction, the guaranty states that the sellers may not proceed against the guarantors unless there is a material breach and the seller liquidates all the collateral and applies the net proceeds against the note balance. Of course, if you recall from the previous blog, the buyer wants the seller to subordinate the note to a senior lender, which would really make liquidating the collateral next to impossible while the senior lender has a lien on the assets.
So the proposed deal may not be dead, but the terms will probably need to be modified. Perhaps the down payment could be significantly higher. And maybe the restrictive clause in the guaranty needs to be eliminated. And the seller should ask to see the financial statements of the owners of the buyer.
We come all the way back to the point made in the previous blog. Does the seller need to sell, is the seller sufficiently motivated to sell for various reasons or does the seller only wish to sell if the terms are right.
Michael W. Margrave
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.