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Guard against agency buyer’s default: Travel Weekly

Mark PestronkMark Pestronk

Q: A large travel agency from another state wanted to acquire my small agency, and the potential buyer’s owner, in principle, presented an attractive offer. The buyer establishes a new company or limited liability company in my state and the new company acquires shares or assets of my agency. The purchase price is paid in quarterly installments over a number of years. What recourse do buyers have if they do not or cannot pay the purchase price?

A: We have no choice but to sue a company that has no assets. So my advice is to try to build protection into your sales contract.

There are at least eight protections you can try to include. Protections are designed to minimize the risk of buyer default and maximize the prospects of recovery in the event of buyer default.

1) A large travel agency must guarantee the new company’s obligations. With such a guarantee, you can sue large agencies for non-payment.

2) Ideally, the large agency owner should personally vouch for the obligations of both the new company and the large agency. While many owners are reluctant to provide personal guarantees, some are willing to do so.

3) A buyer can post a “standby letter of credit” that the bank promises to pay if the buyer defaults. The letter of credit amount will be a current estimate of the parties’ future payments.

Four) The buyer can deposit estimated future installments in escrow with an escrow agent who will pay you if the buyer defaults. Like a letter of credit, this only works if the buyer has sufficient cash or assets to pay the entire purchase price at closing if the buyer so chooses.

Five) When you sell your agency’s assets (rather than shares), you acquire a security interest (lien) in those assets, so you can get your assets back if the buyer defaults. You probably don’t want the agency back, but the threat of foreclosure is good leverage to ensure the buyer pays.

6) Moving on to more unusual types of protection, a security interest can also be obtained with the purchaser’s own travel agency. This gives you even more leverage. Buyers rarely agree to such a lien, but you should at least consider asking for it.

7) When you sell shares (or membership interests in a limited liability company), you can require the buyer to “pledge” the shares. Default.

8) The contract may provide that the buyer pledges personal assets outside the business, such as real estate.

Purchasers must agree to at least some of these protections. Otherwise, be careful not to proceed.