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IFA Adopts Recommended Forms of
Buy-Out Agreements
By John A Beckstead, Esq.
Every factoring company regularly deals with buy-outs. Clients move frequently in the factoring business. Every buy-out seems to necessitate prolonged negotiations and legal expenses. In an effort to expedite this process, the International Factoring Association will introduce recommended forms for buy out agreements at the annual convention in New Orleans. The forms will be presented and discussed at the panel presentation Thursday afternoon. The forms were authored by John Beckstead and Steve Kurtz with input from Mike Ullman and Bob Zadek.
Three forms of buy-out agreements will be presented: Factor to factor buy-out, bank buy-out of a factor, and factor buy out of a bank. The forms are intended to be neutral and balanced for both lenders and for the client. It is hoped that use of the recommended forms will become common place and facilitate the ease of buy-outs.
Understanding the whys and wherefores of buy-out agreements will encourage acceptance of the IFA recommended forms. This article will review the highlights.
In a buy-out situation each of the lenders and the client have different - and conflicting objectives. The new factor wants the transaction structured in a way that he will pay a specified amount and never hear from the existing factor again. The existing factor wants protection against a long list of contingencies. The client wants certainty – no surprises, no double charges, and no disruption of cash flow. The IFA recommended forms strike a fair and appropriate balance between these competing interests.
By Law, an existing factor is not required to do much when the financing ends. Under revised article 9, he or she doesn’t even have to file a UCC Termination Statement. The secured party’s only obligation upon payment in full is to, within 20 days after receiving and authenticated demand from the debtor, either send a Termination Statement to the debtor or file the Termination Statement. Sometimes the Factoring Agreement will also obligate the existing factor to provide a cancellation of the assignment letter for the account debtors. Most factors will voluntarily go further to accommodate a smooth transition.
The key terms that are addressed in the IFA recommended forms are:
The existing factor is to be paid a specified amount by the new factor as of a targeted date, which amount is increased by additional advances, accruing interest, and other fees and charges and reduced by payment received after the date of the agreement until the buyout amount is actually paid.
Upon payment of the buy-out amount, the new factor is authorized to file a UCC Financing Statement Amendments (Termination).
All collections received by the existing factor after receipt of the buy-out amount are to be forwarded to the new factor on a daily basis. If existing factor inadvertently deposits a payment, the payment is to be made to new factor no later than seven days after receipt. Payments are to be sent via U.S. mail.
The new factor will reimburse the existing factor for returned checks if the claim is made to the new factor within thirty days of the buy-out. After that, the existing factor bears the risk.
The client will indemnify the existing factor and the new factor for any reimbursements and other costs in performing the buy-out agreement.
Upon request of the new factor, the existing factor and the client will execute notices to the account debtors notifying them to make payment directly to new factor.
In the event of default under the buy-out agreement, the defaulting party is liable for attorney’s fees.
The IFA form Buy-Out Agreement intentionally does not include provisions for providing documentation, assignment of the existing factor’s position, representations and warranties as to the accounts, release or disbursement of reserve funds, or governing law provisions. It was our opinion that these are best addresses in the agreements each factor has with the client or that they tend to favor one party and detract from the objective of creating a document that is balanced and fair to all parties.
It is hoped that the IFA forms will be embraced in the industry and become the benchmark for buy-out transactions. Our goal is to make buy-outs easier, faster and less expensive, with the ultimate result of making business more pleasant and more profitable.
