After several months of telling family and friends that his wedding venue business on Big Bux Ranch was for sale, Jeff Bux is contacted by his biggest competitor Hustler Plentee who also owns a wedding venue in the next town south of Buxboro. Hustler asks if Jeff will tote-the-note because his credit is maxed out at Buxboro State Bank, which is owned by Ernest “Big Daddy” Bux. Wanting to avoid a broker’s fee and an attorney’s time, and hoping that he might be able to get a job at the Bank, Jeff – uncharacteristically – asks his father for advice to help him sell it himself. Can Jeff sell his own business? If you were Big Daddy what would you say?
Sure. It’s perfectly legal for Jeff to go to the internet and get all the forms that he thinks he needs to button up the sale of the Big Bux Ranch Wedding Venue. Of course, it’s simple, right? There’s no real concern that Hustler has a competing business just down the road, correct? A business owner listing his own business and toting-the-note to permit a credit-thin buyer to purchase happens all the time.
Because most buyers don’t have the cash to buy a business outright, they look to a bank or private lender. Banks and private lenders, however, more-and-more, prefer to lend money to a startup rather than financing the purchase of someone else’s business – causing buyers often to seek non-traditional lending sources and to pay high-interest rates. Hustler’s credit is maxed. A traditional bank loan is not an option for him.
Big Daddy knows that if Jeff finances the sale of his Big Bux Ranch Wedding Venue, it: (i) increases the likely purchase price (assuming Hustler pays off the note!); (ii) gives Jeff a stake in the success of Hustler’s new ownership which likely will help with any transition issues; and (iii) signals to Hustler that Jeff is confident that the Big Bux Ranch Wedding Venue will succeed under Hustler’s ownership. Yes, Big Daddy also knows that most business owners don’t offer seller financing options.
Although Big Daddy is obliged that Jeff asked him for advice, Big Daddy risks not only a family issue with Jeff’s mom Angelica stepping in, he may also have a legal issue with Jeff’s intended sale. Jeff’s wedding venue is on the Big Bux Ranch, which is owned by Big Daddy. Jeff has been informally operating the business on the ranch without a lease. Reaching a formal lease understanding with Hustler will undoubtedly further complicate the already messy circumstances of Jeff trying to sell his business without professional advice, even more messy than just toting-the-note. If Jeff doesn’t want to retain a broker and an attorney, Big Daddy really could use the third-party help and advice, perhaps just to appease Angelica.
Tilting the Scales in Your Favor
Big Daddy’s professional resources will undoubtedly recommend that it is in everyone’s best interest to reduce their risk when selling the Big Bux Ranch Wedding Venue by first dealing with where, if, and how Jeff’s wedding venue will continue to be operated by a non-family owner on Big Bux Ranch. To help reduce Jeff’s risk, Big Daddy’s professional resources should:
- Deal with the venue by first executing a lease with Jeff. Big Daddy will undoubtedly want the lease to prohibit any assignment or change in ownership or control without his written approval.
- Get a substantial down payment at closing. That may be all Jeff gets.
- Check out Hustler thoroughly – his credit, any litigation history and his business demeanor to confirm that he really does have the skills and temperament necessary to succeed.
- Ask Hustler if he can pledge other assets to secure the purchase loan – like the other wedding venue (which is probably pledged to Buxboro State Bank).
- Set up loan covenants – such as minimum working capital and minimum net worth – that permits Jeff to step in early if the business starts going downhill. (Maybe Buxboro State Bank can help with terms suggestions, without sharing their Hustler loan history which would be confidential information).
- Require regular audits to ensure compliance with the loan covenants and review the business financials so that if Jeff needs to take the business back, he has a chance of saving it.
- Communicate frequently with major customers and vendors to know if they are unhappy , and if vendors are cutting back their business with the venue or restricting their credit terms due to slow payment of their invoices.
- Outline a contingency plan if Jeff must take back the business. Some steps may be simple. Others onerous. But all are easier if it is properly thought through ahead of time.
- Stay close to the business and its operation until you get most, if not all, of your money. Don’t expect that your large unpaid loan balance will automatically be paid. Once Hustler owns your business, be careful that he does not start pledging the new wedding venue’s assets, which would require subordinating Jeff’s purchase money security interest to Buxboro State Bank.