Guard against agency buyer's default

Mark Pestronk

Q: A large travel agency in another state would like to acquire my smaller agency, and the potential buyer’s owner has made an attractive offer in principle. The buyer would set up a new corporation or limited liability company in my state, and the new company would acquire the stock or assets of my agency. The purchase price would be paid in quarterly installments over a large number of years. What recourse would I have if the buyer does not or cannot pay the purchase price?

A: You would have no recourse other than having to file a lawsuit against a company that has no assets. So my advice is to try to put protections into the contract of sale.

There are at least eight protections you could try to include. The protections are designed to minimize the risk of the buyer’s default and maximize your prospects for recovery if the buyer does default.

1) The large travel agency needs to guarantee the obligations of the new company. With such a guarantee, you could sue the large agency for nonpayment.

2) Ideally, the large agency’s owner should personally guarantee the obligation of both the new company and the large agency. While many owners are reluctant to make personal guarantees, some are willing to do so.

3) The buyer could post a “standby letter of credit,” which is a promise by a bank to pay in case the buyer defaults. The amount of the letter of credit would be the parties’ present estimate of future payments.

4) The buyer could place the estimated future installments in escrow with an escrow agent, who would pay you if the buyer defaults. As with a letter of credit, this works only if the buyer has enough cash or assets to pay the entire purchase price at closing if the buyer chose to.

5) If you sell your agency’s assets (as opposed to its stock), you could obtain a security interest (i.e., a lien) in those assets so that you could repossess the assets if the buyer defaults. I realize that you probably won’t want to take the agency back, but the threat of repossession is good leverage to ensure that the buyer pays.

6) Moving into the more unusual kinds of protections, you could also obtain a security interest in the buyer’s own travel agency, which would provide even more leverage. While it is a rare buyer who would agree to such a lien, you should at least consider asking for it.

7) If you are selling your stock (or membership interest in a limited liability company), you could require the buyer “pledge” the stock, which means delivering it into the possession of a third party, who would remit the stock to you if the buyer defaults.

8) The agreement could provide that the buyer pledge personal assets outside the business, such as real estate.

The buyer should agree to at least some of these protections. Otherwise, I would caution against going ahead. 

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