HOW TO SECURE A BUSINESS LOAN

As the financial markets change for buying a business and lenders increase the qualification requirements for business buyers, there is a drift toward the seller’s replacing the banks in terms of financing the business purchase.  Prior to 2007 seller financing was rare because money was easy to come by in real estate equity and SBA loans.  Seller financing is now a common occurrence in order for the Seller to attract buyers and get their asking price. 

There are obvious risks with a seller financing the transaction.  In the event the buyer defaults on the loan, the lease and security needs to be structured to protect our seller’s interest. It is the agent’s job to advise the seller on how to best secure the note.

There are three areas where a seller can increase the note's security: (1) buyer's assets; (2) business assets; and (3) the lease.

A seller should never accept an offer without having some picture of the buyer's history; financial, credit and experience. 

Should the seller review the buyer's history and decide to finance a portion of the purchase, then there are several technical devises used to help secure the loan. The seller should always use legal advice on drafting the security agreements securing the loan. 

(a) SECURED BY THE BUYER’S ASSETS

The seller should request the buyer to personally guarantee the loan.  The personal guarantee basically allows the seller to go after all the buyer’s assets in the event of a default, including the buyer’s real estate.  But it doesn’t prevent the buyer from mortgaging the real estate to the 100% level, leaving the seller with nothing in the event the seller tries to collect.  By placing a lien on the real estate, the seller is guaranteed a position in the real estate, albeit the position could be weak when the home has little equity.

(b) SECURING THE BUSINESS ASSETS

Generally there are two assets to secure in a business.  The furniture fixtures and equipment (FF&E) and the liquor license.

For the equipment, the seller should have escrow place a UCC financing statement on the business and assets. This of course doesn’t prevent the equipment from walking out.  Of course, the buyer would be “stealing” should he/she walkout with the equipment, which is a crime.

(c) USING A LIQUOR LICENSE AS SECURITY

For the liquor license (California Only), the only license with meaningful value is the hard liquor license.  Some county licenses are more precious than others.  For example, in Napa, Placer and El Dorado Counties, liquor licenses have been know to trade for well over $200,000. 

Securing the liquor license is tricky and presents certain risks to the seller.

The risk is clear.  If the seller remains on the liquor license, they could have associated liability in the event an accident occurs or someone gets hurt.  The seller should seek legal counseling here.

So if the license has value and the seller decides to accept the risk, the agent has more analysis to do in order to understand what method should be used to secure the liquor license.

The whole point about securing the liquor license is to keep the seller’s name on the license. Here are the options:

(a) In the event the seller holds the liquor license in the seller’s name and not in another legal entity, then merely add the buyer’s name to the license and leave the seller as the primary owner. A corporate entity can be added too. An agreement needs to be drafted whereby once the debt is satisfied the seller’s name is removed. Again, an attorney should prepare this agreement. An interesting point of doing it this way is there is no transfer of the liquor license; hence no transfer process and all the delays associated with it.

(b) In the event the liquor license is under a corporate entity, and the buyer is an individual, then the individual can be added to the license as an individual with the primary owner remaining the seller’s corporation.  As in option (a) above the agent should direct the seller to an attorney to draft the arrangement.

(c) In the event the buyer is a corporation or other legal entity and the seller is either an individual or legal entity, then the buyer’s legal entity needs to be added to the license with the seller’s entity remaining as the primary owner. As in option (a) above the seller should use an attorney to draft the arrangement.

(d) SECURING THE SELLER’S RIGHT TO RE-ENTER UPON BUYER DEFAULT

Sublease versus Assignment: In a sub-lease, the Seller retains the same bundle of rights as though they were the original lessee.  In fact, the seller becomes the sub-landlord in essence, with the key right being the right of re-entry.

 
Remember, under an assignment, the seller loses all rights except the right to pay the rent in the event the buyer defaults.  So the agent should suggest a sublease in the situation where the Buyer is financially weak, bad credit and/or lacks experience. The sublease should be coupled with a personal guarantee or trust deed on the buyer’s real estate and UCC-1 financing statement.

Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry.  Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer.  Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world.  There he participated in more than $11.5 billion of merger and acquisition transactions.  He also worked for top companies such as Nestle Foods, USA. He holds a Bachelors in Business Administration Finance as well as attended Law School at Gonzaga University.