Buyer Beware: COJ

Garnished bank accounts, panicked employees, alienated suppliers, a swift path to ruin. If you’re buying a business and the deal includes seller financing, watch for this landmine: Confession of Judgment I’ve seen seller’s counsel push for these in deals, and we’ve defeated them every time. A confession of judgment is an old-school clause that waives all sorts of borrower rights. It’s usually tucked into or signed with the promissory note. It lets the seller run to court the moment you default and get a judgment against you. No notice. No hearing. No chance to defend yourself. Why a problem in seller financing? Because the seller isn’t just a lender; they’re also a party to the deal. The seller promised the business was in good shape, that they’d support your transition, that they wouldn’t compete against the business, and so on. If the business struggles post-close, it might be on you, or it might not. You may have real claims against the seller. A confession of judgment flips that. It gives the seller a sledgehammer in even the smallest dispute. A rush to judgment before the facts come to light. Just listen to episode 292 of Acquiring Minds for an example of the nightmare. What to do instead? Strike the confession of judgment. Hire a lawyer who knows how to spot them and find a solution. Sellers have a legitimate interest in protecting their rights. But there are other ways (UCC liens, short cure periods, etc.) to allocate these risks appropriately for small business deals. Vet good deals, transact with good people, and make sure you have the right legal framework in place in case things falls apart.