This article are provided for information purposes only, and are not intended as legal advice.


Will the buyer of your business have the finances in place to close the purchase?

May 21st, 2010

When a person is looking to buy a business, you assume that the purchaser has money to close the sale of the business.  You assume that the purchaser has researched the type of financing that is available for himself before looking for a business.  Is this a correct assumption?  When you are selling your house, you take a deposit from the purchaser and have no proof whatsoever that they will have the funds to close the sale of your house.  As a general rule, people do come up with the money but there are cases where the financing is no longer available and they cannot close.

 

Does this happen in business?  When a person starts to look for a business, he/she may talk with their bank manager about loans.  No formal application has been made but the manager says, not a problem, trust me, you qualify for $x of loans.  Can you trust this statement?  Bankers will never confirm if they will lend you money until they look at the financial statements of the business that you are trying to buy. They may finance certain types of businesses and not others or they may lend you money based on your personal assets and do not care what you do with the home – i.e. from a line of credit on your house.

 

On larger transactions, some vendors want proof that they buyer has the ability to close the transaction before they show certain types of information.  On smaller deals, not everyone does a credit check.  They assume if there is no financing condition in the contract that the deal will close on a certain date.  If not, the vendor will grab the deposit help at the lawyer’s office.  It is not that easy to get the deposit money, you may end up in court fighting over who gets the deposit.  The buyer will probably argue that there is a problem with the information you provided and the vendor will argue the opposite.  Who will win will depend on the wording of the letter of intent. Contact your lawyer to determine what wording protects the buyer and/or seller.

 

Remember, most people have signed a non binding purchase agreement if they are buying a business from a business broker not using a real estate standard contract.  The lawyers were working on the purchase and sale agreement but this is only signed when the official closing takes place.  As a result, what recourse do you have?  You need to talk this over with your lawyer.

 

I saw a case many years ago where the lawyer took his holidays when the deal was suppose to close.  He went away for two weeks.  What was the seller suppose to do?  The purchaser did not want any of the employees so the vendor laid them off and the last day of work was the day before the deal was suppose to close.

 

On the Monday morning, the vendor had new business and had no employees to operate the business. The vendor ultimately transferred the business to the purchaser hoping that the deal would close.  In this case, the buyer was a competitor.  He just transferred your business to someone who could steal all his business and not pay him.  On the other hand, the seller had no employees therefore he had no business.  He was stuck and he needed to look at the best of two evils.  After 6 weeks, the sale of the business took place but the buyer and seller were not happy.  The seller was moving out of province and he moved days after the sale officially closed.  The seller was suppose to work for four weeks after the closing and arranged his move accordingly.  He did not plan that the sale of the business would not close as planned. The buyer and seller did not trust each other, both blamed the other for not closing on time therefore the transfer of ownership did not happen as smoothly as hoped.  The seller had to collect the receivables from the customers and pay to the vendor.  The receivables were not sold in this case.  As a result,the buyer and seller had to work together for several months until all was collected. By this time, the seller was living 3,000 miles away.  This also strained the relationship between the buyer and seller.

 

In the end, the deal closed, the vendor got all his money but the sale did not go as smoothly as planned and this was not a result of his doing.  You never know the type of buyer you just sold to until you go through a closing.  Most sale of businesses go smoothly but there are exceptions, this is just one example of a deal which was difficult but did eventually work out.


Filed under: Selling a business — Gary Landa @ 9:19 am


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