When Selling A Business, Neither A Borrower Nor A Lender Be...
By Cliff Ennico
"Last year, we sold our small-sized, family business corporation to two individuals. The deal was that they both pay us half of the purchase price for the business and get equally 50% ownership. While the first person paid his share all in cash, the second person chose to pay his share in 10 monthly installments. The year passed by and he (the second person) did not pay a penny. Now, the new owners aren't talking to each other - they can't agree on even basic business transactions. Unfortunately, the first person can't get out because he personally guaranteed the retail lease for the business. The second person has a poor credit score, due to a prior bankruptcy, so the second person can't put the lease in his own name. It feels like we are stuck. What are the available options to solve these disputes?"
Let's take this one step at a time. First, if I understand your e-mail correctly, you sold your business to the two individuals, not to a corporation or a limited liability company (LLC). This means that they purchased the business as a partnership, which means that they have "joint and several liability" for the purchase price and all other partnership debts. In plain English, each partner is liable for the whole purchase price (not just the amount he paid you at the closing), and you can pursue either or both of them if payment is not made.
Clearly, the second person is at fault for not paying his share of the purchase price. But you have every legal right to collect the entire balance of the purchase price due from the first person, or from both partners, unless you promised the first person in writing you wouldn't do that. The first person can then bring a legal action against his partner seeking reimbursement for his share of the purchase price - lawyers call that a "contribution and indemnity suit". Given the second person's poor financial condition, the suit probably won't be successful, but as the teenagers say nowadays, "that is SOOOOOO not your problem!"
Why did you wait for the second person to miss all 10 of his installment payments before bringing the subject up with him and his partner? If I were in your shoes, I would have been yelling at the top of my lungs and demanding payment the minute the first installment date was missed. It appears to me that you have become a little too friendly with the first person: you have been listening with a little too much sympathy to his "tale of woe", and are reluctant to hold him accountable for his partner's default. Nevertheless, you sold your business in good faith and have every right to collect the full purchase price due to you. What happens between the two partners has nothing to do with the debt owed you, and you have a duty to yourself and your family to collect that debt from whoever has a pocket deep enough to pay.
Assuming that neither partner has the resources to pay you at this point, you have to look at the possibility of taking control of the business back from them. Hopefully, when you sold the business, you insisted that the partners put up some collateral - their stock in the corporation or the assets of the business - for the second person's loan. If the loan transaction was properly drafted, you can "foreclose" on that collateral, take back the business, and satisfy your debt out of the business' future income.
Of course, this will mean you will have to reassume the lease of the retail space where the business is being conducted. If the two partners owe any back rent or other amounts to the landlord, you probably will have to pay these current in order to stay at that location. You also need to look at the paperwork you and the two partners signed at the closing - if they "subleased" the retail space from you for the duration of the lease term, you may still be on the hook as a "guarantor" of their lease obligations until the lease expires - that's the way the law works in most states.
My strong suspicion is that this was a "handshake deal" with no lawyers on either side, and you probably are "stuck". Aren't you glad now you saved a few bucks in legal fees?
Here are a few lessons from this experience:
never sell or buy a business without competent legal help;
whenever you agree to "loan" money to someone, get it in writing and be sure to take collateral in case there's a default;
when assigning or transferring a lease, make sure the landlord releases you in writing from any future lease obligations;
never buy a business as a partnership - form a corporation or LLC to act as the purchaser; and
never go into business with someone who has a prior history of cheating his creditors.
Cliff Ennico (
)is a syndicated columnist, author and former host of the PBS televisionseries 'Money Hunt'. This column is no substitute for legal, tax orfinancial advice, which can be furnished only by a qualifiedprofessional licensed in your state. To find out more about CliffEnnico and other Creators Syndicate writers and cartoonists, visit ourWeb page at
.COPYRIGHT 2009 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE,INC. Permission granted for use on DrLaura.com.