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I’ve been offered to sell my business to another business in what appears to me as a lease or licensing agreement with royalties, but the contract’s language says “purchase”.

In short, the buyer wants to obtain ownership of my business and pay the full purchase price of USD X to me gradually over time, by paying me 25% of the monthly profits each month until USD X have been paid in full.

Regardless of whether this sounds reasonable or not, my only fear is that the buyer may not operate the business successfully enough to pay USD X to me in a reasonable time. Without a time limit or minimum payment per month defined in the contract, would the sale be “valid” if I had not received more than, say, USD 100 after two years?

To put this differently, could you argue (after two years) that the purchase is not valid or has no effect (anymore) since it is not realistic that the purchase price will ever be paid in full in a lifetime?

(Location: California, USA, or New York, USA)

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    You can agree to anything. Whether you should is another question. The question doesn't make clear if this is a recourse or non-recourse obligation. Usually, you would have some circumstances of default that would trigger payment of the entire balance due (e.g. sale of the company or substantially all of its assets to a third party). But, it isn't clear what the terms of this deal would be. – ohwilleke Mar 27 '18 at 4:31
  • @ohwilleke Thank you! I was not trying to ask whether I can agree or not (which I know already) or whether I should agree or not (which is probably hard for you to tell me), but whether such a contract could be declared invalid in hindsight if it turns out that the full payment will never be reached. It’s a non-recourse obligation and will be terminated if the buyer is declared insolvent or bankrupt, or upon agreement between both sides to do so. The only circumstance of default that would trigger a full payment is a direct sale of the purchased business to another (third) company. – caw Mar 27 '18 at 6:03
  • This does help clarify the legally relevant points about what you are asking a great deal. Transactions like this are mostly done for estate planning purposes, rather than between arms-length parties. – ohwilleke Mar 29 '18 at 19:45
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Parties can agree payment terms however they like: it is only unlawful if the terms are so onerous as to be unconscionable. On the face of it this does not appear to be so irrespective of if it takes 5 months, 5 years or 50 years to settle.

Land is sometimes leased for 999 years and countries and companies issue 100 year bonds. The initial lease/bondholder may well be dead before these mature, however, their heirs and assignees will still be around (maybe).

Obviously, such long and unsure payment terms increase the risk of a default, however, the law is happy to let you price that risk into whatever deal you make.

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  • Thank you very much! Taking the example of USD 100 paid after two years (from the question), or USD 1,000 after 20 years, and saying the full amount is USD 50,000 or USD 100,000 – that would mean 1,000 or 2,000 years until full settlement – would that be unconscionable, given that it exceeds the beneficiary’s lifetime by far? I’m asking just to make my understanding of your answer complete. – caw Mar 27 '18 at 3:38
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    Given that you can enter 999 year leases, why would this be a problem? Similarly, governments and companies often issue 100 year bonds. Any natural person beneficiary of any of these will be long gone but their heirs and assignees will still benefit. – Dale M♦ Mar 27 '18 at 4:12
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    @caw If it took 2000 years to pay off, doesn't that mean the business itself must not have been worth as much as you thought? – D M Mar 27 '18 at 4:28
  • @DM Sure, either that, or the seller operated the purchased business poorly, decreased required investments, or abandoned the business without it generating any further profits. If I sold an ice cream parlor, for example, they could lay off employees and cut down costs until both income and expenses would be near zero. The business would obviously still exist, owned by them, but I wouldn’t get the compensation, nor would the business be returned to me. But even if it was my fault in miscalculating the value of the business, would 2,000 years be unconscionable? – caw Mar 27 '18 at 6:10
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    @caw I would say no, it's not unconscionable in my opinion, unless something else is going on like one party is being coerced. If the parties wanted a clause that required payment in full after X years, or a minimum payment each year, they could have included such clauses. I would presume that the purchase price was increased to account for the risks. If it wasn't, that's on the seller. – D M Mar 27 '18 at 6:42

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