We often talk to clients with business loans. Or, clients who bought their business from someone else and are making monthly payments to the seller. The problem with many of the loans or purchase agreements is that no one seems to know exactly what secures the debt.
For example, a recent business loan stated that the loan was secured by all of the assets of the business. Well, at the time the loan was taken out, there actually were no assets of the business. It was brand new. The agreement was vague and there were also none of the required filings done to actually secure the debt.
In another case, the buyer and seller agreed to a purchase price and that the debt would be paid over four years. A couple of years in, the buyer figures out that new business is really losing money and she cannot afford to keep up with those payments. The problem is that the purchase agreement has no details on what the assets of the business were at the time of sale, just that the debt is “secured by the assets of the business.”
There are a couple of main points to take away when you are thinking about buying, selling, or financing based on assets:
- Make sure you follow the law on how to actually secure a debt.
This likely involves talking to a business attorney to follow the right formalities. Yes, it will likely cost you some in attorney fees up front, but far less than when the deal goes south and you are now paying an attorney at an hourly rate to try to squeeze money out of the other side…and it’s quite possible the other side doesn’t have any money anyway.
- Avoid vague agreements.
If the agreement is secured by all assets of the business, then you should know and have a list of what those assets are. Both sides want to point to the other side when a vague agreement ends up in trouble, like in bankruptcy court. The seller saying things like, “well, the buyer should know what assets were there when she bought it” and the buyer saying, “I don’t know exactly what was here and what I bought later…” often just costs both sides a lot of time and money that they don’t have.
Find out how things should be done correctly before there is a problem. You’ll be glad that you took the time and paid the small fee up front instead of big litigation costs later. If you need a referral to a local business attorney in California, please contact us and we’ll be happy to recommend several.
This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.