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Owner Financing


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#1 About To Be A Banker

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Posted 12 July 2005 - 02:12 PM

We have an existing agreement of sale with an apparently legit buyer that has been approved for multiple units by our well known and very conservative franchisor. The agreement provides for us to hold aproximately 25% of the sale price for one year ... interest only for 12 months then a balloon payment of principal. Now the buyer has come back and asked us to finance the balance of what he had been seeking from traditional sources. The agreement allows for the buyer to walk without damages if he is unable to obtain financing. He has apparently been rejected by a local bank ... but has not pursued other sources.

We have two issues ... let him walk after months of being off the market and an incredible amount of time and expense preparing for the ownership transfer ... or provide financing. If we go the financing route, what terms would be typical? What type of collateral should be required ... personal real estate and an interest in a professional corp are potentials. There are potentially personal issues related to the buyers circumstances that I will not disclose, but let's just say that even professionals of high standing can be high risk.

Any advise out there? I'd appreciate it.

#2 Commercial LO

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Posted 12 July 2005 - 02:56 PM

You didn't say what type of business this is but that can be important. I am assuming that there is no real estate involved in the transfer, but that is also not clear. How much money does the buyer have to put into the deal and what percentage of the purchase price is it?

If the buyer has no funds and you were holding a 25% second and the bank was expected to hold 75%, it is no wonder that he/she did not get financing. Is the buyer that financially weak? Whether using my money or not, I would never float a note to anyone who does not have at least 10% from their own funds.

If you are going to hold the note on the sale, I would first look at and verify the buyers personal financial statement. Is there any wat to pull cash from their current assets for a cash downpayment? Are there sufficient leveragable assets to cover you in the event of a default? I would put an immediate lien on any assets I could. If the buyer is not willing or able to put his neck on the line financially, then I would walk away from them.

Terms will vary on the financial strength of the borrower. It's hard to say what terms would be applicable. The higher the risk and the lower the assets pledged, the higher the rate.

Always make a buyer prove their financial strength to you before letting them tie up the business. If the buyers have no money to put down then move onto the next buyer unless you want to shoulder all of the risk of the loan. Even if your buyer cannot get financing from the local bank, you may be able to line up financing via one of the boutique franchise lenders or through an SBA program. Your franchisor should be able to direct you to some finance companies who approve the franchise concept and who can give you the parameters for financing any future buyers.

One other option is to lease the business to the buyer for a year or so to see if they can handle it and allow then to build up some experience and cash for traditional financing.

#3 About To Be A Banker

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Posted 12 July 2005 - 03:10 PM

QUOTE(Commercial LO @ Jul 12 2005, 03:56 PM)
You didn't say what type of business this is but that can be important.  I am assuming that there is no real estate involved in the transfer, but that is also not clear.  How much money does the buyer have to put into the deal and what percentage of the purchase price is it?

If the buyer has no funds and you were holding a 25% second and the bank was expected to hold 75%, it is no wonder that he/she did not get financing.  Is the buyer that financially weak?  Whether using my money or not, I would never float a note to anyone who does not have at least 10% from their own funds.

If you are going to hold the note on the sale, I would first look at and verify the buyers personal financial statement.  Is there any wat to pull cash from their current assets for a cash downpayment?  Are there sufficient leveragable assets to cover you in the event of a default?  I would put an immediate lien on any assets I could. If the buyer is not willing or able to put his neck on the line financially, then I would walk away from them.

Terms will vary on the financial strength of the borrower.  It's hard to say what terms would be applicable.  The higher the risk and the lower the assets pledged, the higher the rate.

Always make a buyer prove their financial strength to you before letting them tie up the business.  If the buyers have no money to put down then move onto the next buyer unless you want to shoulder all of the risk of the loan.  Even if your buyer cannot get financing from the local bank, you may be able to line up financing via one of the boutique franchise lenders or through an SBA program.  Your franchisor should be able to direct you to some finance companies who approve the franchise concept and who can give you the parameters for financing any future buyers.

One other option is to lease the business to the buyer for a year or so to see if they can handle it and allow then to build up some experience and cash for traditional financing.

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Thanks for getting back to me. There is no real estate involved. Just the franchise rights, equipment, supplies, inventory ... in leased space. The buyer has plenty of assets ... home, business, etc. but the buyer also has issues some of which appear to be x-spouse related. The way it looks right now, the buyer would be putting up what amounts to about 12.5% ... we would hold 25% on an interest only for 12 months with a balloon to follow; then hold 62.5% on a reasonably traditional commercial basis with collateral. The questions are ... how long should the term be ... I'm thinking 5 years; what collateral stipulations should there be ... the home is mortgaged at about 70% LTV ... adding the whole nut to the house would bring it to about 96% LTV ... the buyer is a professional with a professional corp ... not certain how to attach that. What interest rate are we talking here. This person is fairly well known in our town ... talked with a banker who said he's got good assets, good income and because of other issues is considered overextended ... but not overwhelmed. So ... interest rate? Can I split the lien on the property and business?

Any advise on this ... I'm not interested in a lease ... I want to move on.

Thanks for your help ... any additional guidance will be appreciated. Referal to other sources also appreciated.

#4 About To Be A Banker

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Posted 12 July 2005 - 03:13 PM

QUOTE(About To Be A Banker @ Jul 12 2005, 04:10 PM)
Thanks for getting back to me.  There is no real estate involved.  Just the franchise rights, equipment, supplies, inventory ... in leased space.  The buyer has plenty of assets ... home, business, etc.  but the buyer also has issues some of which appear to be x-spouse related.  The way it looks right now, the buyer would be putting up what amounts to about 12.5% ... we would hold 25% on an interest only for 12 months with a balloon to follow; then hold 62.5% on a reasonably traditional commercial basis with collateral.  The questions are ... how long should the term be ... I'm thinking 5 years;  what collateral stipulations should there be ... the home is mortgaged at about 70% LTV ... adding the whole nut to the house would bring it to about 96% LTV ... the buyer is a professional with a professional corp ... not certain how to attach that.  What interest rate are we talking here.  This person is fairly well known in our town ... talked with a banker who said buyer has good assets, good income and because of other issues is considered overextended ... but not overwhelmed.  So ... interest rate?  Can I split the lien on the property and business? 

Any advise on this ... I'm not interested in a lease ... I want to move on.

Thanks for your help ... any additional guidance will be appreciated.  Referal to other sources also appreciated.

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Buyer has no experience in this business. Has prelim deal with current general manager to stay on at least one year ... this will help greatly. Franchise is well respected ... frustrated by buyers lack of pursuit to sources provided by franchisor ... other option looks like legal battle over damages.

#5 loanuniverse

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Posted 12 July 2005 - 03:25 PM

A couple of things come to mind:

1- He can walk away if he can show that he was denied credit to purchase the business. I am sure that the clause was purpousely vague. You need to consult an attorney for damages, but from the point of view of an spectator, a lawsuit is far from a sure thing.
2- He is using the situation as leverage, and this is something most people would do.
3- If your business is a well known franchisor, you can probably get another buyer so all is not lost.

talked with a banker who said he's got good assets, good income and because of other issues is considered overextended .

4- I read the above, and it shocked me that you had already agreed to lend him some money without first hand knowledge {after all you agreed to 25% already}.
5- You will need the benefit of an attorney in this transaction.
6- Nothing makes a person honest like a mortgage on their personal house. This would be my first choice for additional collateral.
7- A business' assets are encumbered by placing a lien on them.
8- You can place a mortgage on the house and a lien on the business.


That is it for now

#6 Commercial LO

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Posted 12 July 2005 - 03:27 PM

You can't look at just assets. You have to look at net worth. Assets don't mean anything if he is highly leveraged already.

Make triple sure that the "issues" with the ex are resolved, otherwise his assets may be spoken for already.

Place a lien against the coporation, although that will not necessarily do much for you in the event of a default, AND on him/her personally. A full personal guarantee should be mandatory. Place a second lien on the house. If the buyer is not willing to pledge his house and/or personal assets, then they aren't a serious, motivated buyer and therefore pose, in my judgement, too high a risk. There is nothing wrong with over collateralizing your notes.

A term of three to five years tend to be the norm. I would not amortize the loan out any more than 10 years however, given that there is no realestate involved.

With only 12.5% down, no real estate included, lack of buyer experience, and inability to secure bank financing, you can expect to ask a premium ovr what bank financing would be. Bank financing would probably come in at 7-8% currently. The premium you charge can only be determined by you, your perceived risk in the deal and assets available to remedy a default.

If the buyer has failed to pursue legitimate sources for franchise financing then they are in default of the mortgage clause in the purchase agreement. Let the attorneys hash it out if this is the case.

#7 About To Be A Banker

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Posted 12 July 2005 - 04:12 PM

QUOTE(Commercial LO @ Jul 12 2005, 04:27 PM)
You can't look at just assets.  You have to look at net worth.  Assets don't mean anything if he is highly leveraged already. 

Make triple sure that the "issues" with the ex are resolved, otherwise his assets may be spoken for already.

Place a lien against the coporation, although that will not necessarily do much for you in the event of a default, AND on him/her personally.  A full personal guarantee should be mandatory.  Place a second lien on the house.  If the buyer is not willing to pledge his house and/or personal assets, then they aren't a serious, motivated buyer and therefore pose, in my judgement, too high a risk.  There is nothing wrong with over collateralizing your notes.

A term of three to five years tend to be the norm.  I would not amortize the loan out any more than 10 years however, given that there is no realestate involved.

With only 12.5% down, no real estate included, lack of buyer experience, and inability to secure bank financing, you can expect to ask a premium ovr what bank financing would be.  Bank financing would probably come in at 7-8% currently.  The premium you charge can only be determined by you, your perceived risk in the deal and assets available to remedy a default.

If the buyer has failed to pursue legitimate sources for franchise financing then they are in default of the mortgage clause in the purchase agreement.  Let the attorneys hash it out if this is the case.

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Thank you all for the assistance. As to the default on the financing clause ... the agreement of sale says that the only way the buyer can walk without forfeiting his deposit (10%) ... is if the buyer is not approved by the franchisor (already approved for multiple units) or if the buyer is "unable" to obtain financing. It is my interpretation that there is not a demonstration of being "unable" to obtain financing simply due to a rejection at one bank ... and not one of the many offered by the franchisor as currently doing business with prospective and existing franchise owners. As for the 25% we agreed to finance in the first place ... the buyer has agreed to a lien on the personal residence ... and there is more than enough equity to cover as noted previously. In fact, going for the 87.5% being sought would not exceed 100% ... but at 96%, it's obviously close.

I would appreciate more on the legal side of the potential default issue. I am seeking an attorney experienced in this type of situation. Please keep the advise coming folks ... thanks again.

#8 loanuniverse

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Posted 12 July 2005 - 04:34 PM

I would not comment on legal ramifications other than what was expressed above where you were told that you need to consult an attorney. At what point do you forego your rights under the existing contract by reopening negotiations is another matter I had not thought about. You really need legal counsel due to the complexity of the situation.

#9 Commercial LO

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Posted 12 July 2005 - 05:30 PM

I agree completely with Loanuniverse. The only way to find answers to your legal questions is to consult an attorney. I know that I am not an attorney and I assume that Loanuniverse is not. Not only is it out of the realm our experience to provide legal advice, one should never take legal advice from an anonymous internet board.

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Posted 12 July 2005 - 06:15 PM

QUOTE(Commercial LO @ Jul 12 2005, 05:30 PM)
I agree completely with Loanuniverse.  The only way to find answers to your legal questions is to consult an attorney.  I know that I am not an attorney and I assume that Loanuniverse is not.  Not only is it out of the realm our experience to provide legal advice, one should never take legal advice from an anonymous internet board.

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To be certain ... I fully recognize that legal advise can only come from an attorney. Thanks folks ... I appreciate the time you've taken to respond.





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