Most business ownership transfer plans incorporate payments that will be received over time. For example, you could transfer stock in exchange for an interest-bearing installment note, or you could receive a supplemental pension plan that is funded from the business's future. Whenever the deal is structured with payments received over the long term, you expose yourself to the risk that you may not collect on the debt. It's difficult to protect yourself once your ownership rights have been transferred. Even if you have a secured installment note, your right to claim assets may be secondary to that of another creditor, such as a bank. If you have a supplemental pension fund, you can't collect if the business fails and the payments stop. However, if you'll be depending on your former business for your future income, there are a variety of measures you can negotiate into the sales contract to increase security.
Increasing security in dependence on business
You can set up a variety of measures in your sales contract to increase your security if you must depend on the business for your future income.
Cash flow/balance sheet requirements
Cash flow and balance sheet requirements set financial standards that the business must meet during the payment period.
Guarantees, caps, and dividend limitations
Guarantees, caps, and dividend limitations require the new owner to commit to the business by securing the payment with a personal guarantee and to retain cash in the business by capping salaries, restricting bonuses and perks, and limiting distributions.
Noncompetition agreements
A noncompetition agreement would prohibit you from competing with the business you have just sold. This may allow the business to take a portion of the payment as a short-term, tax-deductible business expense. This reduces your exposure to risk by minimizing the amount to be paid over the long term.
Restrictions on additional financing
Restrictions on additional financing protect your future income stream by requiring your permission for the business to add new debt that will further subordinate your debt and establishing provisions that will trigger default.
Third-party security
Third-party security includes using third parties to monitor the business's financial statements, hold stock certificates, and secure letters of credit.
Retained voting rights
Retained voting rights allow you to retain a measure of control in the business.
Post-sale consulting contract
A post-sale consulting contract allows the business to take some of the payment as a short-term, tax-deductible business expense. This reduces your exposure to risk by minimizing the amount to be paid over the long term.
When can it be used?
You can use these measures to increase your security when you're transferring ownership of a business in exchange for payments that will be made over time (such as a long-term installment note or a supplemental pension plan). These measures are most warranted when you're concerned about protecting your future income stream.
Strengths
These security measures allow you to reduce your risk in depending upon the business for your future income. Some strategies, such as the noncompetition agreement and the post-sale consulting contract, allow the business to write off a portion of the payment as a short-term, tax-deductible business expense. This reduces your exposure to risk by minimizing the amount to be paid over the long term.
Tradeoffs
In establishing security measures, you must balance your need to protect your legitimate long-term interests against the new owner's need to operate the business without unnecessary restrictions.
Prepared by Broadridge Advisor Solutions. © 2025 Broadridge Financial Services, Inc.
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