Selling a business with funding still outstanding

Start with a lien search on your own business, three months before you go to market. Whatever the searches show is what a buyer's counsel will find, and finding it first is the difference between a negotiating position and a surprise.

Asset sale and share sale behave differently

Either way, the personal guarantee you signed is a contract between you and the funder. Selling the business does not assign it, and a buyer agreeing to "take over the debt" does not release you unless the funder signs a release.

The change-of-control clause

Read your agreements for a clause addressing change of ownership, transfer of assets, sale of substantially all assets, or change of ownership generally. Many treat the sale as an event of default, or require prior written consent.

Find these before the letter of intent. Two consequences flow from a missed one: a funder can accelerate mid-process, and a buyer's counsel who spots it will use it.

Where consent is required, ask early. A consent request answered in three weeks is routine; the same request with two days to closing is leverage handed to the funder.

The proceeds arithmetic

• Purchase price: $450,000.00
• Less payoffs at closing: $88,400.00
• Less broker commission at 10%: $45,000.00
• Less legal and closing costs: $9,500.00
• Less escrow holdback at 10%, released after 12 months: $45,000.00
• Cash to the seller at closing: $262,100.00
• If the holdback releases in full: $307,100.00

Two things to notice.

The payoffs are 19.6% of the price, but they are not the largest deduction — the broker fee and the holdback each exceed them. Sellers routinely over-focus on the debt and under-negotiate the holdback.

And the holdback matters more than usual when funding is outstanding, because the indemnity it secures often specifically covers undisclosed liabilities and unreleased liens. A missing UCC termination discovered after closing is exactly the kind of claim that sits against it.

The sequence

1. Three months out. Run UCC searches in your state of organisation and anywhere you have operated. Include filings from funders you repaid years ago — unterminated filings are common.
2. Three months out. Read every financing agreement for change-of-control, consent, transfer and cross-default clauses. Make a list of who must consent.
3. On signing the letter of intent. Request payoff quotes from every position. Refresh them as closing approaches; a quote from six weeks ago is not usable.
4. During diligence. Disclose every position. They are on the bank statements and the lien searches, and an omission found in diligence damages price more than the debt does.
5. Two weeks out. Get each funder's written commitment to file the termination on receipt of cleared funds, and agree the release wording.
6. At closing. Payoffs made as direct disbursements from the closing proceeds, not to you. Each payoff tied to a current payoff letter attached to the settlement statement.
7. Thirty days after. Re-run the searches. If a termination is missing, use whatever holdback or escrow remains.

Getting the guarantee dealt with

This is the item sellers most often forget, because the business is sold and the money has arrived.

Ask each funder for a written release of the guarantee, issued on receipt of cleared funds. Ask for it in the same email as the payoff request — see the guidance on releasing a guarantee at payoff. Where a funder will not issue a standalone release, ask for the paid-in-full letter to state that no guarantor obligation remains.

If any position is not being paid off — because the buyer is assuming it in a share sale, for example — then your guarantee continues unless the funder releases you. A buyer's indemnity is a promise from the buyer, not a release from the funder, and it is worth exactly what the buyer is worth if the business later fails.

What the buyer will want that relates to the debt

• Payoff letters for every position, current at closing.
• Lien searches dated within days of closing.
• Terminations committed to in writing.
• A representation that no other financing exists, backed by an indemnity.
• Sometimes a holdback specifically against unreleased liens.
• Where the buyer is borrowing, their lender's own conditions, which are usually stricter than the buyer's.

What to negotiate for yourself

What to have ready

Current lien searches. Every financing agreement, with the change-of-control and consent clauses flagged. Payoff quotes good through the closing date. A schedule of every position with balance, payment and maturity. And a written list of every guarantee you have signed, with the funder, the date, and whether a release has been requested.

Sale structures, lien priority, consent requirements and the effect of a guarantee all depend on the specific documents and on the law of the states involved. This describes the mechanics and is not legal advice; a sale with debt outstanding is a transaction to run with a lawyer.