Using your own assets to sell business

[Naseem M]

I am selling a business and I have agreed with the buyer to leave £140 000 in the bank account for the business to continue onwards. They now want me to loan them that £140 000 to buy my business as part of an initial £200 000 payment to me and then pay me another £150 000 after the sale and pay that in tranches of £50 000 every 6 months for the next 18 months backed up by a personal guarantee. (Total 350 0000) - I know i am not making £350 000 as i will be taking off the money that is already in the business

The £140 000 is made up of £80 000 deposits made by my customers and £60 000 assets. Can I legally loan him the £80 000 that is not mine

The whole thing feels like a bad deal but ...

 

[cjd]

I think you're last statement is correct.

They want to 'buy' your business using your money to do it? Find a buyer that actually has some money.

 

[Mark T Jones]

Sounds suspiciously like what Clinton would have called a One Pound Charlie.

Ask why they can't borrow the money elsewhere (eg remortgage their home)?

If you are slightly tempted to proceed, these are the minimum steps you should take:

1. Verify their net worth.
2. Structure the loan formally, on commercial terms.
3. Phase the sales so you retain control until it completes.

4 - 10 - take professional advice

 

[Baines Watson]

I am selling a business and I have agreed with the buyer to leave £140 000 in the bank account for the business to continue onwards. They now want me to loan them that £140 000 to buy my business as part of an initial £200 000 payment to me and then pay me another £150 000 after the sale and pay that in tranches of £50 000 every 6 months for the next 18 months backed up by a personal guarantee. (Total 350 0000) - I know i am not making £350 000 as i will be taking off the money that is already in the business

The £140 000 is made up of £80 000 deposits made by my customers and £60 000 assets. Can I legally loan him the £80 000 that is not mine

The whole thing feels like a bad deal but ...

It sounds like you're being asked to loan the buyer £140,000, which includes £80,000 of customer deposits and £60,000 in assets. Here’s a simplified breakdown of the situation:

1. Valuation and Sale Price​

• Business Valuation: First, you need to confirm the actual value of your business. Have you agreed on £350,000 as the sale price?
• Financing the Purchase: The buyer should ideally pay you using their own funds, with any remaining balance paid in installments.

2. The Loan Request​

• Customer Deposits: The £80,000 in customer deposits isn’t really yours to loan. Legally, these funds belong to your customers until services are provided.
• Loaning the £140,000: Loaning the £140,000 to the buyer, especially when it includes customer deposits, could be legally and ethically problematic.

3. Deal Structure Concerns​

• Deal Complexity: The proposed deal structure seems complicated and may not be in your best interest. You might end up financing the buyer with your own money, which increases your risk.
• Simplifying the Deal: It’s usually better to have a clear agreement where the buyer uses their own money for the purchase, or at least, ensures the customer deposits are protected.

4. Next Steps​

• Reassess the Deal: Consider getting professional advice to ensure the deal is fair and that you aren’t taking on unnecessary risks.
• Legal Considerations: Be cautious about using customer deposits as part of any loan or deal. This could lead to legal issues down the line.

In summary, the deal as proposed could be risky and might not be properly structured. It’s essential to clarify the business valuation, agree on a fair sale price, and ensure the buyer is using their own funds or a clear and secure payment plan.

 

[JEREMY HAWKE]

@Mark T Jones That was a long time ago and Charlie has been even more devalued by inflation

 

[Chris Ashdown]

A PG is of no value if the person has no assets or Money

It they have assets like say a home you could put a charge on it using a solicitor, so in a event where they claimed bankruptcy after spending all your money, I believe your money would be safer, but that's assuming the house has enough money in it

Best bet is to get them to pay first and save lots of anguish or loss

 

[WaveJumper]

I think @Mark T Jones hit nail on the head here and personally I think if you go down the route they are proposing its going to end in a huge amount of grief (namely yours) 1, Why cant they raise the money, 2, hopefully you have your own professional advisor to hand

 

[pentel]

Simply thing is that the buyers have no assets.
They need to finance this some other way.

 

[fisicx]

@Naseem M - I want to buy your house but don’t have any money. So can you give me all the money your family has saved up so I can pay the deposit and I promise to pay you back one day.

Don’t sell your business to these people.

 

[ecommerce84]

Agree with everything everyone has said and what @Chris Ashdown says is spot on - a personal guarantee is worth nothing if they have nothing.

Il assuming they are saying they’d sell their house or something to pay you back but I just wouldn’t trust this kind of deal.

I’d walk away from this one.

 

[Naseem M]

Thank you for all of your comments which have focused my mind on the reality of what is happening here. i do have advisors in an accountant and a solicitor and my solicitor is ringing alarm bells but didn't always highlight some of the 'what if' scenarios that you have given me here.

 

[WaveJumper]

Seem to recall a whole load of garden centre owners losing their shirts on very similar deals when a so called "fund" was buying their business's in a similar vain, once they got their hands on the business it was suddenly all transferred out leaving a shell and no money to pay off the loans

 

[Daybooks]

Thank you for all of your comments which have focused my mind on the reality of what is happening here. i do have advisors in an accountant and a solicitor and my solicitor is ringing alarm bells but didn't always highlight some of the 'what if' scenarios that you have given me here.

All things being equal we can deduce the Balance Sheet should comprise:

£k
Assets inc cash 60
Cash (ref customer deposits) 80
Total 140
Liabilities - customer deposits 80
Net Assets 60

Capital and reserves 60

You are agreeing a sale for a consideration of initial £200,000 followed by three further instalments of £50,000 each.

The assets of the business belong to the business and ultimately its owners.

In order for you to loan them £140,000 you would either need those personal funds or would, notwithstanding the legal entity, need to withdraw the funds, paying taxes thereon.

However, on completion the assets and liability become that of its new owners. If they choose to use the funds to help pay the consideration that is a matter for them to consider in light of cashflow and solvency. An issue for you to consider is whether their immediate use of those business funds might jeopardise the financial stability of the business, in your view and thus impact their ability to fulfill the consideration.

I suspect there is a lot more to the Balance Sheet than described; no doubt your accountant and lawyer will guide you through all.

Good luck.

 

[Naseem M]

In order for you to loan them £140,000 you would either need those personal funds or would, notwithstanding the legal entity, need to withdraw the funds, paying taxes thereon.

That is how my accountant initially explained it to me. It was then brought to my attention that a buyer could use assets in the company they were purchasing as all/part of the initial payment they were going to make - it would be treated as a loan and sent to the seller's solicitor and then onto the individual selling the business and there would be no tax to pay - this is from the same accountant.

You are quite right that this transaction would leave a big deficit on the balance sheet for the new owners and whether they could make future payments is quite another thing.

As people have said the whole thing doesn't sit right

 

[Daybooks]

That is how my accountant initially explained it to me. It was then brought to my attention that a buyer could use assets in the company they were purchasing as all/part of the initial payment they were going to make - it would be treated as a loan and sent to the seller's solicitor and then onto the individual selling the business and there would be no tax to pay - this is from the same accountant.

You are quite right that this transaction would leave a big deficit on the balance sheet for the new owners and whether they could make future payments is quite another thing.

As people have said the whole thing doesn't sit right

Please make sure you identify your business from their business and look at any transaction from that perspective. As indicated if on completion they use their newly acquired business funds to pay some of the consideration then that would be a loan from their company to themselves ( in order to pay you ) and nothing to do with you per se. Their withdrawal of that money is likely to give rise to tax considerations for them.

If you took the money out of your business prior, to sale, to loan back to them ( for whatever reason ) then your Balance Sheet would change. The loss of cash asset would be replaced by the asset of you as a debtor which you will need to repay; but an approach not to be recommended I fear. In taking the money out, assuming this is a limited company, you may have tax implications.

I am not sure how such loans could be taken by either parties without tax implications but that is for those parties to take appropriate advice on.

I wouldn’t say it is unnecessarily unusual; after all the buyer is just finding a resource to fund the purchase. You just have to weigh up the risks and rewards.

 

[Paul Kelly ICHYB]

£80 000 deposits made by my customers and £60 000 assets

What are the assets? How can an asset be in a bank account?

 

[DWS]

What are the assets? How can an asset be in a bank account?

Cash on hand in the bank??

 

[Paul Kelly ICHYB]

Oh. I have always considered an asset as something of value, but not cash!

 

[DWS]

Oh. I have always considered an asset as something of value, but not cash!

Cash is King!

 

[Mark T Jones]

Cash is King!

I think you'll find that's Charles.

 

[Daybooks]

What are the assets? How can an asset be in a bank account?

The OP hasn’t said there are “assets” in the cash balance. The OP has said there is £140k cash being £80k from customer deposits and £60k “other” which was later described as “assets”; cash of course being an asset.

 

[Gyumri]

Cash is King!

Credit is Queen.

 

[DWS]

Credit is Queen.

Prince (not the singer) is Liability

 

[Lisa Thomas]

Oh. I have always considered an asset as something of value, but not cash!

Cash is my favourite asset, although I rarely see companies with it...

 

[Lisa Thomas]

Have these customer deposit monies been protected by a separate client account held on trust for the customers?

 

[Naseem M]

Have these customer deposit monies been protected by a separate client account held on trust for the customers?

No we haven't - all of the funds we have are all in one account - we know how much the deposits are as we treat them as Income in Advance in Xero accounting software

 

[nelioneil]

Have these customer deposit monies been protected by a separate client account held on trust for the customers?

Interesting question - are client accounts necessary if the company is not acting as an agency and not in a regulated industry?

 

[Naseem M]

It sounds like you're being asked to loan the buyer £140,000, which includes £80,000 of customer deposits and £60,000 in assets. Here’s a simplified breakdown of the situation:

1. Valuation and Sale Price​

• Business Valuation: First, you need to confirm the actual value of your business. Have you agreed on £350,000 as the sale price?
• Financing the Purchase: The buyer should ideally pay you using their own funds, with any remaining balance paid in installments.

2. The Loan Request​

• Customer Deposits: The £80,000 in customer deposits isn’t really yours to loan. Legally, these funds belong to your customers until services are provided.
• Loaning the £140,000: Loaning the £140,000 to the buyer, especially when it includes customer deposits, could be legally and ethically problematic.

3. Deal Structure Concerns​

• Deal Complexity: The proposed deal structure seems complicated and may not be in your best interest. You might end up financing the buyer with your own money, which increases your risk.
• Simplifying the Deal: It’s usually better to have a clear agreement where the buyer uses their own money for the purchase, or at least, ensures the customer deposits are protected.

4. Next Steps​

• Reassess the Deal: Consider getting professional advice to ensure the deal is fair and that you aren’t taking on unnecessary risks.
• Legal Considerations: Be cautious about using customer deposits as part of any loan or deal. This could lead to legal issues down the line.

In summary, the deal as proposed could be risky and might not be properly structured. It’s essential to clarify the business valuation, agree on a fair sale price, and ensure the buyer is using their own funds or a clear and secure payment plan.

Thank you for this advice, that looks far more sound to me. I have now told the buyer he must finance the first payment which takes all concerns from that aspect away from me and any risks from the customers deposits which will now stay in the bank account when transferred across

 

[fisicx]

Do you trust them to make the second payment?

 

[Lisa Thomas]

Interesting question - are client accounts necessary if the company is not acting as an agency and not in a regulated industry?

If the company enters an insolvency procedure, and the Directors haven't protected the funds, it's considered a breach of their fiduciary duties and we have to report them for misfeasance to the Insolvency Services to consider further action (and potentially pursue them for repayment).

Whether the company dealt with regulated services, or what industry it traded in has no bearing.

Misfeasance claims are determined by S.212 of the Insolvency Act 1986.

It's been touched upon on the forum before here: https://www.ukbusinessforums.co.uk/...deposits-pre-orders-and-gift-vouchers.425250/

 

[cjd]

Thank you for this advice, that looks far more sound to me. I have now told the buyer he must finance the first payment which takes all concerns from that aspect away from me and any risks from the customers deposits which will now stay in the bank account when transferred across

Are you sure you want to have to think/worry about any of these possibilities?

Loaning someone else money to buy your business in the hope that they'll pay you back eventually feels like a snake eating its own tail to me. You wouldn't sell your house or your car this way. Please find a buyer with some money of his/her own or the ability to borrow it - just not from you.