28 May Early Possession (Part 1 of 2)
We recently received a very interesting article from an old friend. It seems that the owner of a gas station decided to sell and found a buyer who wanted to get into business right away. The price, as the article pointed out, was the proverbial “too good to be true”. The buyer wanted to get into the station as soon as possible – the next day would be fine with him. He gave the seller a check for a substantial portion of the selling price and took over. When the check bounced in a few days the “former owner” went immediately to the station. First he saw the sign advertising gas for cut rate prices and everything in the C-store part of the station selling for half price and the “new owners” were long gone. They had made nearly $50,000 between half price gas and half price on everything in the C-store. The old owner was back in the station.
I remember another deal where the buyer took early possession and the seller ignored checking on him for a few days – and when he did the place was closed and all of the FF&E and inventory were gone – the place was completely empty. And, obviously the down payment check bounced.
This prompted us to take a look at the subject of early possession. Following is from the Complete Guide to Business Brokerage covering this subject.
There are times when buyer and seller think it appropriate if the buyer went in and ran the business before the sale actually closed. This idea generally occurs for one or more of the following reasons:
- The buyer needs the income.
- The seller really has had it.
- The time to closing is excessively long.
- The seller is in poor health and can’t operate the business (or something similar.)
- The buyer and seller get together and think it’s a wonderful idea.
- The buyer feels the business is deteriorating and wants to get in before more damage is done.
Technically speaking, early possession is when the buyer takes over before the actual (and legal) closing of the sale. Allowing the buyer to take early possession is wrong for all the obvious reasons.
When a buyer finds out that operating a business is really hard work and he realizes that the sale hasn’t closed yet, he may get second thoughts. The same thing happens as a result of faulty equipment, “no show” employees, nasty customers, inconsiderate suppliers, etc. In other words, when the dream becomes reality, as it must, the buyer may decide that business ownership is not what he thought it would be, and he attempts to stop the sale.
On the other hand, once the sale is closed and the buyers realize that they own the business, their thinking changes. It’s theirs, and they go from there. It never crosses their mind, as it does in early possession that they can get out of the sale.
Early possession can create a real obstacle to a closing, whether it’s real estate, a business or almost any other commodity. It just makes good business sense not to have early possession. Unfortunately, in too many cases it begins, or at least the idea develops, before the broker is made aware of it. Once the buyer and seller start discussing it – the problem begins and it’s tough to reverse the process. But, if you don’t do something, and early possession takes place, you know the whole sale is in jeopardy.
The seller is the real crux of the issue. The buyer is ready to go — after all, it’s her new venture and she is all excited. So you have to convince the seller of the risks he is running, not just to the business, but to the sale itself. Once a seller realizes that it’s really not in his best interests, you can usually end the process right there. After all, the seller really does call the shots when it comes to early possession. When the seller thinks about it and realizes the buyer really could run the business, he or she will have second thoughts about early possession.
Part 2 of this article will post on Thursday and give suggestions of how to proceed if the buyer and seller insist on early possession.