Keeping the Focus Where it Belongs
Insights from Marlon M. Lofgren, Associate and Partner, Koley Jessen P.C., LLO
Seller financing can often be a critical factor in getting a business sold. If properly structured and documented, seller financing is really no different from financing that would otherwise be provided by a bank. Below is a brief guide to navigating the issues normally encountered in seller financing.
First Things First
The first question is usually that of how to structure and document the financing. The buyer should be expected to sign a promissory note evidencing the loan from the seller, with interest and repayment terms mutually agreeable to both parties. The seller might also require that the buyer grant the seller a security interest/lien in the purchased assets to secure the loan. It’s also not unusual for a seller to require that the individual owners of the buyer (assuming the buyer is an entity) personally guarantee the loan. In most cases, the documents are usually pretty straightforward and do not need to be overly complicated.
"If properly structured and documents, seller financing is really no different from financing that would otherwise be provided by a bank."
- Marlon M. Lofgren
If a bank is also financing the sale, the seller will most likely be required by the bank to sign a subordination agreement. This is an agreement between the bank, usually referred to as the “senior lender,” and the seller, referred to as the “junior lender.” A subordination agreement sets forth the terms between the lenders as to each lender’s right to receive loan payments from the buyer and the priority of their respective security interests/liens in the purchased assets. The document will usually state that the senior lender’s loan and security interest/liens shall at all times be superior to those of the junior lender until the senior loan is paid in full. Most lenders are willing to discuss and negotiate the junior lender’s right to receive loan payments from the borrower. Lien priority status, however, is rarely compromised by senior lenders in subordination agreements. The senior lender will insist on having a first priority security interest/lien in the purchased assets.
Tying it All Together
Even the most savvy of “numbers people” need a leg up in negotiating a purchase. As with so many aspects of doing business, retaining experienced legal counsel enables you to keep the focus where it belongs—employing your entrepreneurial skills in the identification and acquisition of profitable business ventures.