Loan Issue Threatens Closing

Loan Issue Threatens Closing

Hi Tom,

Once again I need your opinion.

Situation:

I have a deal that made it through due diligence and all parties agreed to move to the closing (scheduled for yesterday). In late 2010 the seller had taken a personal unsecured loan and paid off his business equipment loan from 2008 (UCC filed with the state). After weeks of pressure to produce the payoff letter, the seller informed me the second loan was in fact not an unsecured loan as he thought but a restructured loan which still used the equipment as collateral. I have confirmed it is a personal loan, but the UCC is still in place and naturally the bank will not terminate it. The seller refuses to pay off his personal loan with the proceeds of the sale. The buyers are not happy.

Question:

Do you have any suggestions as to how this deal might be structured which will allow the sale to go through and the seller not to pay off the personal loan?

JG


Our Response

The full price is the full price. I assume that it covered all the assets, etc., including the equipment. The only thing I can think of is to have the buyer assume the loan and deduct the amount from the full price. The bank may balk at the buyer assuming it since they have the seller on the hook. But I’m sure they would allow the buyer to make the payments. If the seller is financing the sale, the payments could be deducted from the amount owed the seller. Why can’t the seller continue to make the payments – the equipment is only the collateral for the loan. Is this a cash sale or as I mentioned is the seller financing it? This could make a difference. If the seller did finance the deal, the buyer would have resource against the note on the equipment if the seller didn’t make the payments. The seller is stuck – your commission is due and he will have to pay it and the buyers could sue for specific performance. You should be able to convince the seller he has to take care of it one way or the other.

Tom


Hi Tom,

This is a cash sale. The loan documents state it is not assumable or transferable. The seller was planning on continuing the payments after closing. The bulk of the sale price will be required to pay off the loan which won’t leave him much (thus his insistence in not paying it off). The buyer won’t accept any chance they could lose the equipment due to the seller’s future default.

I made some inroads today with the seller in getting him to understand exactly the position he is in.

In reviewing the loan documents this afternoon, I noticed the loan is indeed in the seller’s name and not in the business’s incorporated name (contrary to the bank’s assertion). The bank may have to remove the UCC whether they want to or not. I’ll know more tomorrow after the attorney reviews it and calls the lender.

Thank you again for your assistance.

JG


Hi Tom,

Just a follow up note:

I followed your suggestion and laid out for the seller in black and white what it could potentially cost him if he refused to close. He was stuck and was going to have to pay everyone involved including potentially the buyer who was screaming about damages from liquidating an annuity to make the purchase.

After a few conversations with the bank, we were able to get them to accept a lower payoff amount as payment in full. The deal did finally close a couple weeks ago.

I was a little taken back that in the end the seller was angry at me even though I got him full asking price from a cash buyer for a business with no verifiable documentation of anything. I don’t think I’ll ever figure out how I ended up the bad guy.

Thank you again for your assistance.

JG