Collecting on a Promissory Note Given in a Sale of Business

If you sold your business and took back a promissory note from the buyer, you may be looking forward to the monthly payments and the nice revenue stream your business continues to provide after it was sold. However, if the buyer is having trouble continuing your success with the business and is therefore starting to miss payments or has stopped making payments altogether, you must take appropriate action.

Basically, you are now in a situation where you must collect from the maker of the note you took back on the sale of the business. Of course, the first step will be to find out as much as you can from the buyer as to why he or she has stopped making payments on the note. If you cannot work something out with the buyer to re-establish the payments, you will have to start formal collections. You can either hire an attorney who has experience with commercial collections or try a commercial collections agency (who can hire a law firm if they are not successful). The important thing is to move quickly once you have determined there is no hope of the buyer making payments because of the statute of limitations.

If the note was unsecured, the collections process is fairly simple but may result in a less satisfactory resolution. This is because an unsecured note has no collateral securing it, which means the only remedy is to sue the maker of the note and hope you can satisfy a judgment through wage garnishments, bank levies, or placing liens on the judgment debtor’s properties. On the other hand, if the note was secured, by real estate, a security interest in the assets of the business you sold or a pledge of the shares in the business sold or even another business, the collections process will be more complicated but you may end up with a better result. In this situation your remedies would include foreclosure of the collateral securing the note (and you may even be able to get your business back as a result).

As you can see, the process of collecting on a promissory note you take back when you sell a business can be quite involved. A big question will be whether the note was secured. It is for this reason, among others, that it is best to consult with a qualified attorney prior to selling your business to ensure that you are adequately protected in the event that the buyer is unable to make payments on the note.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction. This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation. If you need legal advice, consult a qualified attorney.

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About Elio Palacios, Jr.

Attorney Elio Palacios, Jr., represents individuals, corporations, entrepreneurs, small businesses, startups and early stage businesses, physicians, dentists, and healthcare businesses in corporate, business and commercial transactions and litigation. He also counsels employers and individuals on visa, immigration and naturalization matters. Visit www.PalaciosLawOffice.com to learn more.
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