Need opinion on a creative financing proposal

[markj]

We have made an offer to buy three of the stores in a successful, twelve-store fast food chain. The price is set and the seller agreed to finance the purchase after a sizable down payment. Unfortunately, the deal has stalled because the seller has cross-collateralized the stores and cannot get them unwrapped without paying substantial penalties and taxes. In order to satisfy the lenders, they've now proposed that we take over the stores but that they would continue to "own them on paper" while using our money to pay off their loans. We would not receive clear titles until their loans were satisfied. While I believe I know the seller quite well and that they have little chance of business failure, how can we be protected should they experience problems? They'd have received hundreds of thousands of dollars from us by the time they pay off their debts. Would some kind of lease-buy scenario work... like leasing a car or a piece of equipment with a one dollar buy-out at the end?

[vangogh]

First welcome to the forum Mark.

Something sounds very fishy to me. I wouldn't buy the stores while allowing the current owners to remain the legal owners. I realize I don't know these people and you do, but that has scam written all over it. I'm trying to think of some positive advice, but quite honestly all I can think to say is to tell them no. Sounds mainly like a case of caveat emptor. Let the buyer beware.

Whatever your paying for the store should be enough to cover their loans. I'm not sure how paying off loans would incur penalties and I doubt they're suggesting is going to change what taxes they ultimately do or don't pay.

If you honestly think there's something worthwhile here I would absolutely hire both a lawyer and an accountant to look over everything before signing any agreement.

[markj]

Yes, it seems very fishy on the surface but I believe these people are trustworthy. However, that doesn't protect me in the least should they have a financial disaster down the road. I'm very inclined to walk away if I can't discover a way to become comfortable with the arrangement. I have discussed it with counsel who wants to wait to review their proposal which I've expected for some time. The delay makes me believe they haven't come up with a plan they think I'd accept.

[vangogh]

I would definitely talk to an attorney about this given the potential for what could go wrong. It's hard to believe they need to take your money without legally turning the business over to you. If things are so bad for them that selling the business doesn't pay back their loan for the business then they probably should be heading to bankruptcy court.

The best way to protect yourself is to have an attorney on board who can check any paperwork before you sign. Even then I'd be very cautious and careful.

[tylerhutchinson]

I would go to a lawyer and ask them. Have them draft up legal documents to back up their claims and all the details. It sounds a little too messy for me to be 100% "for" getting into something like that.

[greenoak]

i can see why they would want a deal like this....but imho they would be lucky to find someone to willing to be entangled like that...
.you will probably have enough on your plate without having to deal with their future and unknowable financial problems....and how would it affect your future credit ? sounds way too risky to me...

[Spider]

fishy?
scam?
too messy?
entangled?

Oh dear! Fools rush in where angels fear to tread, eh? Maybe, but I have also learned that creativity is the mother of good fortune.

Not to buy the stores while allowing the current owners to remain the legal owners? Why not? That's how we buy cars and boats and motorhomes every day. In fact, the regular home mortgage is only one step removed with foreclosure so easy.

Mark, Take your time, be careful, and study the specifics. I have a feeling there is a great opportunity staring you in the face.

[vangogh]

Frederick. I have this bridge in Brooklyn I'd like to sell you. Interested? :)

Words like fishy and scam, etc are being used, because this isn't typically how a business is sold. It is typical for cars and boats and homes. When it's not typical it makes you wonder. By the way when I bought my last car and my current home title transferred to me at the sale. The car I paid full price for. My home was financed through the bank, but as long as I continue to pay it stays mine. I'm not being asked to pay off the mortgage and then trust that the bank will transfer the title to me.

In this case Mark is being asked to make all the payments and then the title transfers. That's a big difference. He could make all the payments and still not end up owning the business.

Also when you consider the specifics it's an owner of 12 fast food stores that are supposed to be successful and yet the owner has


cross-collateralized the stores and cannot get them unwrapped without paying substantial penalties and taxes.

Something doesn't feel right about that. Wouldn't the money from the sale be enough to pay off the debt? At least enough to unwrap things. Should a successful chain be unable to sell off part of the business without incurring penalties of taxes it can't pay? What penalties? Is a bank going to penalize them for paying off their debt? If the business is successful why would it have trouble paying taxes on the sale?

It's certainly possible everything here is legit, but there are some warning signs. I don't think anyone is saying it's definitely a scam. What we're saying is it doesn't feel right and Mark should be consulting an attorney. He's being asked to take a big risk that could lead to either a big reward or a big loss. The smart thing to do is seek the advice of an attorney and do as much to protect himself as possible to lessen the potential loss as much as possible.

[Spider]

Mark, Take your time, be careful, and study the specifics. I have a feeling there is a great opportunity staring you in the face.

[vangogh]

Frederick I'm curious about why you think this is a good opportunity. You may be right and it may very well be a good opportunity. Realistically none of us knows the situation well enough to know one way or the other. From what Mark told us there seem to be some warning signs that would urge caution and counsel with an attorney so he can protect himself should he decide to invest.

You say you have a feeling there's a great opportunity here and I assume something in what Mark said is leading you to believe that. I'm just curious about what that might be.

[Spider]

Frederick I'm curious about why you think this is a good opportunity. ... From what Mark told us there seem to be some warning signs that would urge caution and counsel with an attorney ... You say you have a feeling there's a great opportunity here and I assume something in what Mark said is leading you to believe that. I'm just curious about what that might be.Mark: The price is set and the seller agreed to finance the purchase...

Owner financing is always worth looking at. It says the owner/seller believes in the value - it's not a grab-the-money-and-run deal because the seller will be around (and on the hook) for as long as it takes to complete payment. Not to mention the avoidance of constraints from outside bankers. It also means the seller will be around to assist, should that be needed, and the seller is rather forced to assist if it is needed otherwise he is likely to not get his money!

Mark: the seller has cross-collateralized the stores and cannot get them unwrapped without paying substantial penalties and taxes

I don't know why that may have been done and I'm not about to assume the worst without knowing the details. Certainly it will have to be checked but until it has been clarified it is an unknown - not a negative, just an unknown.

Mark: proposed that we take over the stores but that they would continue to "own them on paper" while using our money to pay off their loans

Nothing unreasonable about this.
... 1. The supposition that the money from the sale should be able to pay off the seller's loan is null and void because the money from the sale will only be a portion of the value - that is to say, the deposit, which, of course, will be a lot less than the total value of the purchase.
... 2. The subject here is the sale and purchase of a business, not the sale and purchase of some real estate. (Real estate does seem to be included but that is not certain. Maybe "buying a store" means buying the business and equipment but not the physical building, which may be rented.) If the reputation of the seller rests on the continued goodwill of the buyer (remember nine of the stores will remain in the seller's hands) then it would be prudent for the seller to retain an interest in the sold businesses in case the buyer acts in a way that reflects badly on the remaining restaurants. (Food poisoning immediately springs to mind.)
... 3. A seller who has a loan outstanding on a property would be most unwise to sell that property and transfer title until his own loan is paid off, otherwise a defaulting buyer (with the title) would leave the seller totally na ked regarding his own loan commitment (a loan outstanding and no title to the security.) *
... 4. The seller's lender would not permit the sale of the property without immediate full payment of the loan (secured loans are generally "due on sale") and if the seller is agreeing to finance Mark's purchase, the seller would have to pay off his own loan in total immediately.

Considering the above, I see the possibility that Mark may be able to negotiate taking over the management of the three restaurants he wants at far less cost than buying them, with a contract to purchase them some time in the future at a price fixed today, and even have some of the profits Mark generates in the meanwhile being applied to the eventual purchase.

Of course, there are so many unknowns and still much negotiating left to do, that who knows where discussions will lead. But, I hope this answers the question, Why I think this could be such a great opportunity.


* Added : Not to mention that a buyer would be most unwise taking the title to a property that is standing as security for another peson's loan.

[vangogh]

The price is set and the seller agreed to finance the purchase

Ahh…I missed that. I was thinking Mark was going to finance things himself and pay off the business. That's why it didn't make sense to me that the title couldn't be transferred. That statement makes a big difference in a lot of what followed.


the seller has cross-collateralized the stores and cannot get them unwrapped without paying substantial penalties and taxes

This one to me is still something of a warning sign. I keeping asking myself if this business is doing so well why does it need to be unwrapped to pay off what's owed. I'm not saying it's automatically the worst, but rather something that makes me wonder and more likely in the negative column than in the positive one.


proposed that we take over the stores but that they would continue to "own them on paper" while using our money to pay off their loans

This makes more sense given the seller refinancing things. It still makes me uneasy as the potential buyer. The reasons you offered for this being ok make sense, but it still makes me uneasy. Maybe it's more a personal things, but if I'm paying that much for something I want assurances it's mine as long as I make the payments as agreed.

I think as long as Mark can get some kind of protection to ensure the business title transfers to him at some point it's ok to buy in. My main advice here is to consult an attorney, because none of us can get him that legal protection.

Another thought is to not take the seller up on the financing offer and instead seek financing through a bank or similar. If Mark finds financing on his own it should eliminate the need for the title to say with the current seller.

[phanio]

I would guess that the loan agreements they have will not allow them to re-lease the property or business. Regardless of how well you know someone - when it comes to money people become cut throat.
In my oppinion they got themselves in this mess and they should pay to get out - they should have done so prior to working a buy deal with you. Why they did not is another red flag or they plan it this way - for you to pay for their error.

If I was in your situation - I would go with my gut feeling. And, since you came here for advice, I would assume that you are having the wrong feelings.

It is OK to back away - tell them to fix this issue or you walk. There are / will be plenty of other opportunities (maybe even better ones) for you if you do not follow through here.

[silversteve]

I would like to agree with Vangogh on the first response posted. Whatever you do, be sure to consult an attorney to ensure that your best interests are not violated.

That being said, there is a possible "lease" related program that you could suggest that the current owners take advantage of - its called a "Sale Leaseback." What happens in such a program is that a business sells existing equipment to a leasing company for cash, only to turn around and lease the same equipment right back. The equipment, in the meantime, stays put on the premises, so the use is uninterrupted in the operations of the business. The business can maintain the equipment for a small monthly fee (added benefit - depreciation of equipment is no longer an issue). The cash that is raised as a result can be used to pay off outstanding loans, giving you the ability to take possession of the business "on paper." This method of raising capital has an additional benefit: the owner avoids using existing credit line, thereby maintaining the limits and current credit score. Finally, since this has stalled up your deal, you should know that this process is rather quick (shouldn't take more than 2 weeks to complete and initial approval will usually be granted in just a few business days).

If the current sellers agree to doing this, they'll be able to liberate the business of any existing debt, giving you the chance to take possession of the business without incurring debt. So follow your initial instinct and explore existing financing options!

[thebizinator]

Mark,

Do you know how they acquired the debt in the first place? Was it business related or other?

A business deal like this could certainly work but you would have to have everything in writing and include stipulations for certain scenarios that could put you in the hole.

[scottmcconnell71]

I'm curious, has anything happened with this in the past few days?