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Security of staged payments when selling business

Is there a standard way to ensure stage payments are paid when selling a business

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I have been approached by someone interested in buying my small sole practitioner practice. I am happy with issues around valuations and clawback etc

However one thing I'm not sure about is how people would normally secure the second and/or third payments from the buyer, because it is unlikely the buyer would pay for it all up front.?

Is there a standard way this can usually be achieved or is it very much done on trust?

Any thoughts from anyone with experience of this would be much appreciated.

Replies (15)

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By Tim Vane
17th Feb 2020 16:17

Escrow

Never ever do on trust for anything other than insignificant amounts.

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Lisa Thomas
By Insolvency Practitioner
17th Feb 2020 16:18

Couldn't the Solicitors deal with it?

How about Escrow? Doesn't cost much.

I've used these in the past:

https://www.transpact.com/

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Hallerud at Easter
By DJKL
17th Feb 2020 16:23

Escrow of course only works if buyer already has the readies, if he/she intend to earn them out of the fee block then it will not solve the issue.

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Replying to DJKL:
RLI
By lionofludesch
17th Feb 2020 16:43

DJKL wrote:

Escrow of course only works if buyer already has the readies, if he/she intend to earn them out of the fee block then it will not solve the issue.

Nail on head.

What about a clause in the contract to say that ownership of the fee block passes back to you if the payments aren't met within 7/14/30* days of due date?

Not what you want, obviously - but, then, neither is not being paid.

*Delete as appropriate or add your own figure.

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Replying to lionofludesch:
Hallerud at Easter
By DJKL
17th Feb 2020 17:17

Catch is how you "own" them once A N Other has been the point of contact for x months with these clients.

I suspect security for debt works better.

An alternative might be all fees earned from the clients paid into a distinct bank account with rules who can withdraw what, so say 50% to seller 50% to buyer.

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By paul.benny
17th Feb 2020 16:44

If there are no funds to put in escrow, can you take a charge on the assets (business or personal) of the buyer?

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Replying to paul.benny:
Hallerud at Easter
By DJKL
17th Feb 2020 18:01

Depends what the buyer is and the assets- floating charge may work with a company but if another lender in play you are then into the joys of ranking agreements et al.

The older I get ,the more I have seen, the more sceptical I have become about the ability of legal documentation to fully protect anyone re an obligation from a third party re a future sum receivable

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By atleastisoundknowledgable...
17th Feb 2020 18:17

Get a PG for the payments.

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Bramble
By Chris.Mann
18th Feb 2020 08:39

Even though you say that the practice is "small", wouldn't it be advisable, to utilise the services of a Solicitor, who I imagine, would include a legal undertaking for the secondary funding of the arrangement?

If the practice is so small then, I can't see why the whole of the funds aren't deposited with a Solicitor who could then manage the distribution of the secondary instalments.

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By Montrose
18th Feb 2020 11:25

Good question. A client sold a small business with part payment deferred. When it was claimed the client received a copy of what purported to be a death certificate of the purchaser, which stated that the purchaser had been stillborn !
Despite police involvement money never paid- now there's a surprise

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By Openhouse
20th Feb 2020 09:17

Thank you for feedback. We certainly would be using a solicitor to handle a sale if a price is agreed. I was just asking to see if there was a commonly followed procedure of securing staged payments because I certainly have no intention of just doing it on trust. Personal guarantee or Escrow seem to be sound suggestions but obviously a solicitor would also have his own suggestions

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By Openhouse
21st Feb 2020 08:44

Have had further discussions with potential buyer. He seems keen and has suggested he pays for the business by direct debit over 36 months and doesn't feel there is a real need for a formal legal agreement he would be happy a gentleman's agreement!
Doesn't sound quite right to me.
Certainly I would have thought a proper legal agreement with personal guarantees would be a minimum requirement for both sides. I can see some attraction with the direct debit idea but that sounds more like me helping provide the funding for the purchase; surely the correct approach would be for the buyer to approach a proper lender and borrow the money to purchase the business?
Just wondering if I am being a bit stubborn and blinkered on this?

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Replying to Openhouse:
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By Wanderer
21st Feb 2020 09:07

Openhouse wrote:

He seems keen and has suggested he pays for the business by direct debit over 36 months and doesn't feel there is a real need for a formal legal agreement he would be happy a gentleman's agreement!
Doesn't sound quite right to me.

If a (seller) client of yours came to you with this proposal what would be your reaction?
Get the legal boys / girls involved.
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By Openhouse
21st Feb 2020 17:35

Totally agree on the need for proper legal support.

Any thoughts on payment by direct debit over 36 months; seems a bit unusual to me.

I would have thought a decent sized up front payment followed by one or two subsequent lump sums to finish the job off would be more normal

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Replying to Openhouse:
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By atleastisoundknowledgable...
21st Feb 2020 17:43

Openhouse wrote:

Totally agree on the need for proper legal support.

Any thoughts on payment by direct debit over 36 months; seems a bit unusual to me.

I would have thought a decent sized up front payment followed by one or two subsequent lump sums to finish the job off would be more normal

That is more normal. The situation here is that he doesn’t the the money to buy it and it hoping to pay it 100% out of earnings.

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