December 07, 2020
There is a lot more risk in selling your business when you turn over the keys to the buyer before getting all of your purchase price.
This deal involved the sale of a third-generation family business to a long-time friend and business owner. The Evanston, Illinois based company manufactured and distributed advertising specialties and promotional items.
The buyer principal owned an athletic apparel business. He formed a limited liability company which purchased the seller’s assets for $ 1 million payable in installments after the closing starting with $5,000 per month for the first five months, and then $16,250 per month for the remaining sixty months.
The buyer never made any payments and the seller owner sued the buyer LLC and the LLC owner for breach of the asset purchase agreement in a Chicago federal district court. The seller owner was a party to the APA. The buyer owner was not. The buyer owner asked the court to dismiss the claim against him and the court granted the request because a member or manager of a limited liability company is generally not responsible for the liabilities of the LLC.
This case is referred to as Shevin-Sandy v. Athletic Specialties, LLC., No. 20 C 1181, United States District Court, N.D. Illinois, Eastern Division, (August 17, 2020)
Assume the owner of the seller did not ask for better legal protection because they were longtime friends. Probably not friends now.
Red lights should go off when all of the purchase price is to be paid after the closing. This risk should have been managed. At a bare minimum the buyer should have put up its assets as collateral; the buyer owner should have personally guaranteed the purchase price; and possibly the buyer owner should have put up additional collateral.
Even better, the seller should have gotten some or all of the purchase price at closing.
By John McCauley: I help people manage M&A risks involving privately held companies.
Telephone: 714 273-6291
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