How to secure payment for the sale price of a company?
Retention of title
In a sales agreement, the parties can specify when the ownership company being sold will transfer. The agreement can stipulate that the company remains the property of the seller until they receive the full payment. This means that even after the sales agreement is concluded, the buyer will not become the owner of the company until they make the payment. Such provisions are commonly found in the sale of shares in a company, where the seller retains ownership of all or part of the shares until full payment is received. This type of security is undoubtedly beneficial for the seller. However, investors often expect to take over the company immediately upon the conclusion of the sales agreement and payment of the first, usually the largest, installment of the sale price. In such cases, a compromise could involve the gradual transfer of ownership of the shares to the investor along with subsequent payment installments.
To secure the deferred payment of a part of the sale price, an escrow account can be used. An escrow account is a bank account where a specified amount of money is deposited and temporarily "frozen," meaning it cannot be withdrawn until a predetermined date or the fulfillment of certain conditions agreed upon by the parties. This method provides secure protection for the seller as the bank oversees the funds. However, the investor needs to have sufficient funds to cover the entire sale price on the day the sales agreement is concluded. An escrow account is often also used for potential post-transaction settlements with the seller regarding any disclosed company defects.
Mortgage on real estate
Another method to secure payment is to establish a mortgage on the property owned by the buyer. If the company being sold owns real estate, it is also possible to establish a mortgage on the real estate owned by the company. It is important that the value of the real estate is sufficient to cover the investor's obligation to pay the remaining part of the sale price. This method provides convenient security for the seller, as it increases the chances of recovering the remaining payment through foreclosure. Meanwhile, the investor does not need to freeze funds, such as in an escrow account, or incur additional costs associated with servicing the debt.
Guarantee and bank guarantee
Securing payment for the deferred part of the sale price can also be provided through a guarantee. In a guarantee agreement, the guarantor undertakes to make a specified payment if the investor fails to do so within the agreed-upon timeframe. The guarantor's liability is joint and several to the investor's liability. This means that the creditor can demand payment from both the investor and the guarantor when the payment deadline arrives. It is important to note that this security protects the seller only if the guarantor is a party whose solvency is not in doubt. For example, when a financially stable company acquires another company indirectly through a special purpose vehicle (SPV), often a limited liability company with minimal share capital, the parent company can provide a guarantee for the payment of the sale price by the SPV. This arrangement should ensure that the seller receives the full sale price.
Another commonly used method of security is a bank guarantee. It is an agreement between the investor and/or guarantor and the bank, sometimes also involving the seller, in which the parties specify that if certain circumstances stated in the agreement occur, the bank will make the remaining payment to the seller. A bank guarantee provides the seller with confidence in receiving the remaining part of the sale price. However, it requires the investor to bear additional costs.
Voluntary submission to enforcement and promissory note
Both the voluntary submission to enforcement by the buyer and the promissory note issued by them do not guarantee the seller's receipt of the deferred payment. However, they provide significant facilitation in case the seller needs to enforce their rights through legal or enforcement proceedings.
A voluntary submission to enforcement must be drawn up in the form of a notarial deed, which serves as an enforceable title. This means that the seller, in case of non-payment by the investor, can initiate enforcement proceedings much more quickly without getting involved in lengthy court processes.
On the other hand, a promissory note authorizes the issuance of a payment order, which can serve as a security title without requiring a clause of enforceability. Upon receiving the payment order, it would be possible, for example, to seize the owed amount from the investor's bank account, provided that such funds are available. As seen, this can significantly expedite and facilitate the process of seeking payment through legal proceedings.
The above options are not exhaustive methods of securing payment for the sale price. It is also impossible to provide a definitive answer as to which method is the best. The final choice is usually the result of complex negotiations in which each party strives to negotiate the most advantageous method of securing payment.
Michał Walczak, Paweł Skurzyński