NEGOTIATING EFFECTIVE COMMERCIAL AGREEMENTS

If you are involved in negotiating the sale of a business and are worried that the other party may not honour any post-closing obligations, here is a list of tips that will help you. Let’s assume that you are selling a business and a portion of the sale price will be paid on closing. You are likely to be concerned that the buyer may default in paying the unpaid balance. What security can you reasonably ask for to reduce your risks?

1) The obvious security you will ask for is a Promissory Note setting out the outstanding balance and the amounts, and the dates that post-closing payments are due.

2) In addition, if the business is incorporated and it owns the assets, you may want to ask for personal guarantees from each of the individuals involved in the purchase. A personal guarantee is a form of “collateral security”, [ie. collateral to the Promissory Note].

3) If the business has assets of value, meaning that it isn’t just a service business,  you may want to ask for a General Security Agreement that can be registered under the applicable jurisdiction’s  personal property registration statute. In Ontario this is known as the PPSA or Personal Property Security Registration Act. Even if the business being sold has outstanding bank financing already secured under the PPSA, better to register in second position then not at all.

4) In addition to this, where the business is incorporated, you might want the individuals involved in the purchase to pledge their shares while a part of the sale price remains unpaid. That way they can’t sell or mortgage their shares while they still owe you money.

5) Lastly, you might also ask these individuals to subordinate any loans they may make to the corporation so that you come first. This means  that they agree that you get paid back before they ask for repayment of their loans to the corporation.

6) And don’t be shy about asking, especially if you don’t know much about the buyers. Banks do this all the time!