Selling a Business Note With Security Financial
Selling a business and taking back a promissory note is common practice. However, finding investors to buy a business note without real estate as collateral is a bit more challenging. Fortunately, We Buy Notes™ is a company that specializes in buying business notes!
It’s very common for business owners to carry a portion of the sale when selling a business, and sometimes, the note can be sold with as little as 2 months of seasoning.
The founder of a company contacted us after he sold his business and took a note as partial payment. The new owners defaulted on the note, closed down the business, and the old owner is now facing re-opening the shop to recoup some of the money he should have been paid.
Windows, Doors & More Contracting Business
- Sales price: $800,000
- Down payment: $300,000 (cash)
- Note amount: $500,000
- Amortized over: 120 (10 years)
- Interest rate: 5.25%
- Seasoning: 45 months
- Note balance: $345,965
Some of the things that were not attractive:
- low interest rate
- amortized over 10 years (5-6 is good)
- a corporation signed the note and there is no personal guarantee by any of the corporate members
But there are some things that make up for it:
- strong cash down payment
- almost 4 years of seasoning
- low note-balance-to-value (43.2%)
If you have something like the above scenario we can provide a free note quote for a partial note purchase.
People selling business notes need to understand that typically, there are significant discounts involved, so if you’re not prepared for a 20%-50% discount (depending on all factors involved), then you’d be better off waiting out the term.
Good reasons to Sell a Business on a note
✓ Seller financing increases the number of potential buyers
✓ Seller financing increases the likely purchase price (assuming the buyer pays off the note!)
✓ Seller financing gives the seller a stake in the success of the new owner, which is likely to help with transition issues.
✓ Seller financing signals to the buyer that the owner is confident that the business will succeed under new ownership.
Set up some loan covenants, such as the buyer needing to maintain a certain level of working capital or a particular level of net worth. That allows you to step in early if the business starts going downhill. (You may need to ask a banker for advice; they do this sort of thing all the time.)
Demand regular audits to ensure compliance with the covenants, and also that the business is being run honestly. If you need to take the business back, it’s imperative that you not have to clean up ethical issues left behind by the buyer.
Stay in touch with major customers. Know if they are unhappy or cutting back their orders.
Sketch out a contingency plan for taking back the business. There may well be some simple things that will help you if worse comes to worst. Think it through ahead of time.
Do not sail around the world, trusting that all will turn out well (unless you can afford to walk away from the unpaid balance on the loan.)
Our team has the know-how to guide brokers to fast closings. But what makes us unique is our ability to offer very competitive bids – our cost of money is low because we use a mix of our own equity and very reasonably priced unsecured lines of credit.
We use our own funds to buy notes – we don’t depend on outside investors to fund our portfolio, so our funding decisions are made in-house. This allows us to offer a more seamless underwriting process and fund more quickly.
What happens if the business’ cash flow doesn’t cover the monthly payments?
Even though cash flow is the most important factor, it’s still part of a larger picture. Investors will still buy a Note with slightly insufficient cash flow if the payor’s payment history and personal credit score are excellent.
How long is the underwriting process?
Our underwriting process (which begins when the seller accepts the broker’s quote) takes 10 to 15 business days. We rely on brokers not only to clearly communicate which documents we need to review but also to encourage the seller to provide these documents quickly. In instances where the seller is motivated and we receive a full loan file rapidly, deals can be closed in as quickly as 5 business days.
Businesses come in all shapes and sizes, the same applies to business notes. When it comes to purchasing a business note we have two requirements before we will consider evaluating the cash value:
– the payor must have 50% equity
– and the balance of the note must be no less than $50,000.
If your believe you have a solid business note to sell but the equity or note balance doesn’t quite fit our requirements we still encourage you to submit the note for a quote because we have made exceptions in the past.
Once we’ve established interest in the note and provide you with a quote, closing is much simpler than that of a real estate note. We’ll start with a basic checklist of documents that we’ll need to close and instructions on securing any documentation that’s either missing or was not addressed at the original closing.
On all business notes it’s important we know the terms so we can evaluate it and make a cash offer. The basic info I’ll need to start working on your business note:
Is the building owned or leased?
If Leased, what is the lease term and extension term?
What experience does the payor have in this type of business?
Annual gross revenues?
Annual net revenue?
Name of business, address and years in existence?
Is the note personally guaranteed?
Is Operation A Franchise?
Is The Building Part Of The Note?
Is The Building Owned Or Leased By Payor? Owned Leased
If Location Is Leased, What Are The Terms For Renewal?
Is The Note Signed By A Corporation?
If Signed By A Corporation, Is The Note Personally Guaranteed?
Is There a Signed Security Agreement With UCC-1 Recorded?
Is This A First Position Lean?
The documents typically needed to get started:
copy of the note (front and back, or allonges) – be sure you keep the original note handy
copy of the security agreement – you’ll need the original
copy of the purchase agreement if a purchase-money note
copy of the bill of sale
copy of closing statements related to the creation of the note
copy of the appraisal, if any
copy of the payor’s original credit application and credit report
documentation of payment history
Let’s get started!