“Arm’s Length” Buyer in a Workout… What’s That?

This is a very important concept in a workout as so many borrowers in default believe they can protect their assets and business by selling to their wife, son or daughter, brother or sister, mother or father… all “insiders” or buyers who, by definition, are not “arm’s length” buyers.

It is generally understood and accepted that people with close family ties will lie for each other and thus any sale to such an insider is deemed fraudulent on its face without the need to demonstrate or prove any fraudulent activity taking place. It is simply assumed. These transactions are easily pierced and undone, returning everything to the way it was. We have had banks object to managers of a business wanting to buy out existing owners, stretching the “insider” concept even further than it was intended.

There have been situations, however, when we wanted to use an insider for a variety of reasons, all legitimate but still a violation of insider sales. We disclosed the buyer’s relationship and supported our sale with an appraisal of which the value determined would be paid. We have convinced the bank or the SBA to accept these sales despite such irregularities if presented effectively, with integrity and documented support.