What Happens When a Business Places Liens on Its Property Then Sells the Business?

Introduction

Business loan and credit providers prefer profitable companies with a strong multi-year operating history and strong cash flow. If the business does not fit this profile, lenders and large suppliers will want collateral. According to the National Foundation of Independent Business, property – residential and commercial, personal and business – is a significant collateral source for small business loans. When a business owner successfully sells a business, he will need to address any outstanding property liens.

Lenders like business owners to allow liens against real and personal property as collateral

Property as Collateral

Collateral is an item pledged as security for a loan. When a lender accepts property as collateral, it places a lien on that property and records the lien with the county in which the property is located. Sometimes lenders place a blanket lien which covers all the assets the company owns at the time the lien is filed. This lien is called a Uniform Commercial Code, or UCC, filing.

Business Sale

Since so many businesses fail within the first five years, it is an achievement to sell a business. You can sell your business as an ongoing enterprise to someone who wants to continue to run it or sell it for its assets to someone who needs your equipment and customer lists. If you sell the business as an ongoing enterprise, you can do so as a stock sale or an asset sale.

Stock

With a stock sale, unless explicitly stated otherwise, the new owners take over the entire company – its name, personnel, and any obligations including any liens. You must list all liens on the business and its property. It is up to the new owners to verify, but if you do not disclose existing liens, the new owners could sue you later. The new owners may request removal of the liens.

Asset Sale

With an asset sale, the new owner takes over all listed assets, wholly unencumbered except where explicitly stated otherwise. You still own the corporation or LLC but the company is now a shell that you would typically dissolve. You must remove any and all liens, otherwise those liens will stay with your now shell company and could become your personal obligation since the business now has no operations.

Release

Use the proceeds from the sale of the business to fully repay any loans in the business’ name. When you fully satisfy the loan terms, the lender must completely remove all liens and provide you with written documentation of loan satisfaction and lien removal. It is your fiduciary duty to your company and to the buyer, per your Purchase Agreement, for you to check all Secretary of State, county or municipality filings and all associated legal documents to ensure compliance. Occasionally, a bank forgets to remove a UCC lien or a lien against a particular property. If they do, you must notify the bank to correct the errors immediately.