Author Topic: My in-laws sold their restaurant and accepted seller financing...risks?  (Read 505 times)

jeromedawg

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Hey all,

So my in-laws finally sold their restaurant (Chinese restaurant in the SoCal area) after years of listing it. The restaurant is run in a rented space that they pay 'discounted' rent on to the current landlord. The current landlord was very particular about wanting to keep it a Chinese restaurant where someone would just take over operations or re-brand. At the same time he wanted to make sure my parents had fair or better offers on the table - he could have accepted offers from other prospective tenants to come in paying much more for rent but he wanted to make sure my in-laws sold the restaurant first, which is a nice gesture. My in-laws had a really good relationship with his parents, who were the prior landlords of whom he inherited the property, so that's mostly why.
A buyer came in offering to do more or less the same at way under their asking price ($180k offer with $60k of seller financing against the asking price of $230k) but there was at least one other offer on the table. My in-laws were so desperate they they accepted the $180k w/ $60k seller-financing w/ only 8% interest on a 2yr term as they didn't want to have the offer "walk off the table" - they didn't even consider countering. They are past retirement age and just want it off their hands, so understandably so but they tend to rush head-first into these kinds of decisions and it ends up being a bad decision down the road. This is what I fear regarding the whole seller-financing part too. I guess the upside is that they'd get $120k out of it and the restaurant back. I just don't understand why they didn't counter when they had the leverage of the other offer, or at least counter with a higher percentage interest rate. We spoke to the broker before they received the offer, anticipating what it would be, and he was leaning towards countering up especially if the buyer wanted a big discount + seller financing. Apparently my in-laws didn't listen to him, which is their bad, but ultimately their decision.

Anyway, what are some other unforeseen risks that we/they should be aware of in this kind of situation?
« Last Edit: November 07, 2018, 11:20:28 AM by jeromedawg »

MDM

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Re: My in-laws sold their restaurant and accepted seller financing...risks?
« Reply #1 on: November 07, 2018, 01:12:44 PM »
Compared with most other fixed income investments, 8% is not bad at all.

If the buyer pays as scheduled, all is well.

If the buyer defaults, the buyer doesn't get the $120K back and your in-laws (eventually, after whatever legal hurdles are needed to establish default) get to resell the whole thing.  Just make sure the contract language supports this.

If they don't need the $60K now, there doesn't appear much downside to the seller financing.  What price they accepted is a separate issue.

jeromedawg

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Re: My in-laws sold their restaurant and accepted seller financing...risks?
« Reply #2 on: November 07, 2018, 01:23:15 PM »
Compared with most other fixed income investments, 8% is not bad at all.

If the buyer pays as scheduled, all is well.

If the buyer defaults, the buyer doesn't get the $120K back and your in-laws (eventually, after whatever legal hurdles are needed to establish default) get to resell the whole thing.  Just make sure the contract language supports this.

If they don't need the $60K now, there doesn't appear much downside to the seller financing.  What price they accepted is a separate issue.

Thanks for the response - Yea, assuming the contract covers the default-situation, I guess that mitigates that risk mostly.

In terms of the pricing, the broker was telling us separately that the buyer was probably going to offer $180-185 and that he would advise my in-laws to counter accordingly. I'm not sure why they didn't - maybe they felt like this one would slip away and they just wanted to make things "easy" but in cases like this, if a buyer really wants something usually they'll be inclined to consider the counteroffer and either accept or make a counter to that right? I guess I don't have a good gauge on a situation like this where the restaurant is in a leased space. I just feel like they left money on the table and shorted themselves on the price though. Things have been slow with the sale but they were never very aggressive about it or even responding back to offers from other potential buyers. The only thing that has changed is my mother-in-law has become more desperate to quit working as she's tired. I wish they would have considered all this years ago...
 

jeromedawg

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Re: My in-laws sold their restaurant and accepted seller financing...risks?
« Reply #3 on: November 07, 2018, 11:17:08 PM »
I should mention that at some point the landlord and broker were discussing the viability of the landlord buying the business and continuing to run it, but then the offers came up and they put that on the back burner. I think this would have been most ideal though because the landlord probably would have given my in-laws favorable terms. The problem is the the landlord and broker have never owned or run a restaurant business so they would be taking on much risk. The restaurant itself hasn't been doing great either, so I don't think either of them would want to depend on my in-laws for help in making a smooth transition or bringing in new owners that all sides can depend on.

Anyway, I guess we'll see how this all plays out. The amount of money they're getting is not much given the fact that they have no significant amount of savings outside of any of this. It is somewhat concerning as they have a mortgage on a house (though it has been refinanced so they have a very favorable interest rate, and they are also currently renting a couple of rooms out to tenants to help subsidize the cost). They receive social security money but that's all they're going to have if the sale goes through and they stop working; other than the $200 per month they'll be getting per seller financing.