Buyer Beware: COJ

searcher profile

April 11, 2025

by a searcher from George Mason University in North Carolina, USA

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.
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Reply by a searcher
in New York, NY, USA
I strongly recommend listening to Will Smith's interview of a searcher who signed a COJ and discovered the how they can quickly destroy your life as a business owner: Business Collapse After Going All-In (Oct###-###-#### COJ is a big deal and you need to be aware of its potential implications to you as a searcher. The default SBA language for many banks includes Confession of Judgment language because the "National 7(a) Authorization Boilerplate" guidance from the SBA isn't clear and appears to require it. But I can confidently say that the SBA does NOT require COJ language in all cases. It depends on what state the borrower is a resident of. Nevertheless, our bank pushed back HARD when I said I wouldn't sign something with it and it added another month to the closing timeline. We went back and forth -- the resolution was sending it to the SBA for manual approval, which they provided without any follow-up questions. It was easy but took time. Find the 2018 SBA National 7(a) Boilerplate language and ctrl+F for your state to see if this is something that you can push back on. As far as I tell, only Maryland, Virginia, and Pennsylvania require COJ language. A few other states say the lender may include it at lender's option (such as Delaware and Ohio). And on seller notes, I cannot fathom accepting a confession of judgment language in a seller note after listening to the Acquiring Minds episode I cited above. It was harrowing.
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Reply by a searcher
from University of Southern California in Charlotte, NC, USA
A seller's lawyer tried to get this in the purchasing agreement on an early draft. We got it out. We were able to align on a step by step process if there are any issues that everyone thought was fair and provided warnings before it came to legal action
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