What happens if the acquirer doesn't pay the seller financing?

May 23, 2024

by an intermediary from Creighton University in Los Angeles, CA, USA

Searchfunder, I need your help. Since seller notes are typically unsecured and don't have collateral, what happens if the new owner doesn't pay the seller financing? Does the seller get their business back in this situation? Do they have to sue them?

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Reply by an intermediary
from Spring Hill College in Dallas, TX, USA

Generally, it's important you don't assume that you automatically regain ownership of the business - unfortunately this is a common myth. Unlike a regular asset-backed loan where the lender can reclaim their collateral, seller notes are usually unsecured debts. The buyer retains ownership of the business, even if they stop making payments. If you look at the purchase agreement and terms of the promissory note, and look at the default provisions you'll see if there was an explicit remedies Other Available Remedies Legal Action: The main option - take legal action for breach of contract. This typically includes: - Filing a lawsuit for the unpaid amounts, plus interest and fees. - Securing a judgment against the buyer. - Trying to collect through methods like asset seizure, garnishment, or other enforcement strategies. But I would at first pursue a negotiated workout: before going to court, parties often try to: - Adjust payment terms. - Lower the principal amount owed. - Accept equity instead of cash payments. - Reach a settlement for less than the total amount owed. Even if you go to court, you'll be in better position showing willingness to provide a mutually acceptable way forward. Check protective measures in note(s) structure(s). If you have a "personal guarantee" you are in better stance Check "security interests": while its not widely common, you might have or even be able to negotiate security interests in specific business assets or a blanket lien on all assets even at this stage. Look specifically for "acceleration clause"> These allow the full payment to be due immediately if default happens, rather than just for missed payments. It can trigger "default" status A big one see if there are "cross-default" provisions...>This can trigger a default if the buyer defaults on other debts (like bank loans or leases). Rare but good lawyers and business brokers often insert "covenant restrictions" What these do.. they limit the buyer’s ability to engage in actions that might hurt their ability to pay (like excessive distributions, taking on more debt, or selling off assets). But as in all dealings, you have to be practical. Recovery rates: Typically, when unsecured seller notes go into default, they typically recover about###-###-#### cents on the dollar, depending on the buyer’s situation and other assets. Time and cost...legal proceedings can take anywhere from 1 to 3 years and might cost between $50,000-$200,000 or more in legal fees. And on top, by the time default happens, the business is worth a lot less than when it was sold. Still a good lawyer may be able to help you identify contractual breeches or other opportunities to make taking back the company a possibility. Hope this helps. It would be worth a call to SMB Law who is known as one of the best while specializing they do it all, and would also know the angle for remedies. They're amongst the very best. If you do, ask for Eric Pacifici (FL) or Kevin, or anyone there.

Reply by a searcher
from University of Notre Dame in Austin, TX, USA

Banks will often view seller's notes--i.e. sub debt--as an equity tranche when calculating Debt to Equity ratios. The key is to outline in what cases seller note cannot be paid back in PA. Often the seller-note stands by if the acquirer falls out of loan compliance (i.e. Debt Service Coverage). It is all about the agreement up front. And forecasting why the acquirer might be in the position where he/she may not be able to pay it.

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