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Don’t Let a Lien Topple Your Business Value
Over the last few months we’ve been discussing how to build value in your alarm business, whether or not you have plans to sell. Among other things, we talked about Contracts, Reporting Habits, Client Communication, Employee Training and Documentation.
Here we’ll be talking about an overlooked area that can crumble a deal if you are considering a sale.
What is a Lien?
Wikipedia defines a lien as “a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation.”
Now, using debt or credit in your business is not necessarily a bad thing – it’s often the only way to expand capability or capacity.
But when that debt needs to be “secured” or guaranteed in some way, a lien can be put on your business until the debt is “satisfied.” A mortgage, for instance, is a type of lien you are familiar with – if you don’t pay the mortgage, the bank owns the building and will take it back.
This is called a consensual lien. Assuming you read the contract, you agreed to the lien as a way to secure the credit or loan. These are very common and most buyers or lenders will require this for a transaction to take place.
Make sure to read every contract and understand the agreements into which you are entering, so you completely understand the lien language and how it may influence your business in the future.
A lien may put you in a difficult position preventing you from being able to decide on how you get credit, how you borrow and where you spend your money in your business. The lien holder is first in line to get repaid – not you, not your employees or any of your other business obligations.
There are liens that can be applied to your business without your consent. These are the liens you must watch out for.
Statutory or Judicial Liens
Some liens are triggered by state and federal laws. Mechanics Liens, for example gives interest in the title of your property to a contractor who supplied labor or materials that improve the property.
There are dozens more sub-categories of liens, and they vary from state to state.
The one that can apply to every business is a tax lien. A federal tax lien may arise in connection with non-payment of any kind of federal tax, including your income taxes, gift tax, or an estate tax.
The IRS will not hesitate to put itself first if it finds you are avoiding your tax obligations and they will rarely remove it before all obligations are fulfilled.
Another type of nonconsensual lien is a judicial lien. A judicial lien is created by a court judgment against you. These are difficult to get removed without an attorney and even more expense.
Whether it’s a consensual, statutory or judicial lien, they all lock the value in the business, with the intention of using it to pay back the debtor. If you plan to sell all or part of your business, either you will be unable to do so, or any money from the sale will go straight to paying off the debt.
How do I remove a lien that is the result of unpaid debt?
If a lien is levied against your business – keeping you from doing additional business – your first priority should be to take the steps to remove it. The quickest way to do that is to pay the amount due. This might seem obvious, and the reason you found yourself in this unfortunate situation is probably because the cash was not available in the first place, but doing nothing is the worst course of action. (Or maybe we should say, inaction).
So, make an aggressive plan to pay it off.
And be careful not to fall for any of the “services” offering to wipe out debt. They cannot remove a tax lien. Only the IRS can do that.
In the case of a judicial lien, your attorney may be able to help get the judgment removed, or negotiate the quickest path to restructuring the debt. Of course, we are not attorneys and you should consult your lawyer when entering into contracts or find yourself in need of releasing yourself from a lien. But we have facilitated hundreds of business sales, and we’ve come across our fair share of alarm business owners surprised by a lien that had the potential to scrap a much-needed deal.
Bottom line, you need to be aware of any liens being placed on your business and what they include! They take control away from you, often when you need it most.