A friend and I are trying to buy a business from a guy who is willing to take a fairly small down payment and carry a note for the balance over 5 years. The seller wants us to put a second on one of our homes to secure the note but we don’t want to do this since we are in effect just purchasing the accounts of this business and no other real assets like equipment or machinery. He is afraid we may just walk away after a year or 2 and leave him with the business and an unpaid balance.
Does anyone know of a bond we could post or something along these lines to make the seller happy and protect him?
Any suggestions are welcome. Thanks
Well, you could get a standby letter of credit.
But of course the bank that issued the letter of credit may very well want security - perhaps a second mortgage on your home. (D’oh!)
I’m not clear on why you don’t want to give him a mortgage. Is it because you are worried that the accounts are not worth what you hope?
Are you personally liable on the note?
Does the business have significant receivables?
What happens if you and your partner have a falling out?
I assume that you have not engaged an attorney to represent you.
I don’t know if this is a big enough transaction to warrant engaging an attorney, but I can tell you that there are many traps for the unwary. For example, a good attorney will make sure that the seller signs a non-compete agreement. This will prevent the seller from setting up a new business just like the old one and stealing back his former customers.
If there is significant $$ involved, you should seriously consider getting a good lawyer on your side.
(standard disclaimer: I’m not your lawyer, etc. etc.)
Dang, all the good advice has been given. I will point out that were I in the other parties shoes, I would demand some collateral as well.
What sort of business is this? Are the accounts liable to be around for five years, or by the nature of the business, are they very perishable? If they aren’t likely to be around in a few years, I would be extremely insistant about demanding the collateral (if I were the other guy that is).
If you’re not willing to put out some collateral, the odds are you’re not convinced on the value you’re getting for your money. If that’s the case, you should consider renegotiating the price down to a point where you are comfortable putting your house on the block.
A lot of good advice here. There are a few other issues that you should think about, including whether you should be buying the business, or just its assets, and whether you should form a corporation or similar entity to take title.
If this deal is worth more than a few thousand, see a lawyer.
Five years is a long term commitment. You and your partner/friend should put something down on paper about what will happen if one of you decides to leave the partnership. Five years is long enough that this is not an absurd outcome, it could happen and you should both agree of what you will do.
Specifically, imagine this: you put your house on the block to buy this business. You and your partner work your asses off, but after a year it’s not going well, and he wants out. You’ve still gotta keep payments going to the former owner or he gets your house. What do you do? That’s not a crazy possibility and you and your partner should think hard of what you’ll do if it happens and put on paper what each partys responsibilitys will be. Here’s that line again, but a lawyer is a good idea.