Selling Business Notes for Quicker Cash
By Thomas` | November 2, 2008
In about 85 percent of all business sales, sellers accept a
cash down payment and a promissory note to pay the balance
in installments. The note is personally guaranteed by the
buyer, and it is secured by the business and its assets in
case the buyer defaults. Providing owner financing allows
sellers to cater to a broader pool of potential buyers.
However, many sellers dont want to be in the lending
business and would prefer not to hold business notes. The
good news is: they dont have to. If you created a business
note to unload your company, you can sell the note to
someone else. This way you can get instant cash out of the
business, instead of waiting to receive periodic payments in
the future. You can use the cash for a variety of purposes,
including: capitalizing on other investment opportunities,
paying off debts, funding college tuition and making major
purchases.
How Selling Business Notes Works
Business notes are purchased at a discountlike all notes
sold on the secondary marketto make them attractive to
potential buyers. Without a discount, there is no incentive
for investors to incur the risk of waiting three to five
years or even longer to recoup their money. Historically,
more than 90 percent of new business owners fail within the
first five years. Therefore, theres considerable risk
attached to the purchase of any business note.
You may receive less than the full balance of your note when
you sell it. However, the total cash you receive from the
down payment and the sale of the note will usually be about
the same as you would have received from an all-cash sale of
your business. That's because all-cash buyers can insist on
a much lower selling price.
The amount of money youll actually receive for your note
depends on a number of factors. But as a general rule, for a
full purchase, you can expect to be paid 50 to 80 percent of
the balance of the note. More specifically, the amount of
cash your note can be sold for will be determined by three
general components: the current economic environment, the
terms of the note (payment amount, interest rate, length of
payback, etc.) and the degree of risk or probability that
the note holder will lose his/her money.
Criteria for Purchasing Notes
Certain guidelines must be met in order for a business note
to be purchased. Naturally, first-position liens are
eligible. Here are some other elements investors like to
see:
The business is in a profitable position, with evidence of
operating cash flow.
The buyer has good credit, which generally means a FICO
score of at least 625.
The buyer put down at least 30 percent of the purchase
price in cash, which signifies that he/she is truly
committed and able to weather down cycles.
The principal owners have made a personal guarantee on the
note.
The note has been "seasoned," meaning the buyer has made
payments for at least two months. This shows that the buyer
is happy with the purchase.
The note should have a minimum face value of $15,000.00.
Structuring the Sale
There are a number of ways to structure the sale of your
business note. You can sell the entire note, or only part of
it. The most common way to sell a note is through a "partial
purchase," which involves selling only a certain number of
the remaining payments on your note.
Note buyers can purchase any number of the remaining
payments in a variety of ways. For example, let's say you
have a note with a balance of $80,000 payable in 240 monthly
installments. If you need just $20,000 now, for whatever
reason, the note buyer would calculate how many payments
would need to be purchased to provide you with that specific
amount of cash. Exactly which payments would be purchased
would depend on your personal financial situation. You could
sell:
A certain number of the beginning payments on the note.
(The note buyer might purchase the first 60 payments, and
then you would receive the final 180 payments.)
A certain number of the final payments on the note. (The
buyer could purchase the final 180 payments, passing the
first 60 payments through to you.)
A certain percentage of each of the remaining 240 payments
on the note. Perhaps 50 percent of each of the 240
installment payments could be purchased. (You would receive
one half of each of the 240 payments.)
So which option in the above example would be best for you?
It would depend on your current financial needs and future
concerns. All of the alternatives would provide you with an
immediate $20,000 cash payment. However, you might choose
the first option if you need $20,000 today and require a
future monthly cash flow beginning in five years. You might
choose the second scenario if you needed $20,000 now and a
monthly payment for the next five years until you start
receiving your retirement benefits. Or you might choose the
third option if you need $20,000 today and also want/need
the monthly 50 percent payment for the next 20 years.
The Purchase Process
To purchase a business note, buyers will need to take an
assignment of the security instrument (UCC-1 Financing
Statement) and receive an endorsement of the promissory
note.) But before getting to that stage, they will do the
necessary due diligence and closely examine all aspects of
the sales transaction of your business. The note buyers will
handle all the paperwork for the purchase, from verifying
all aspects of the deal and preparing/having recorded all of
the necessary documents to make the change.
The note purchasing process takes an average four weeks to
complete. If the sale of your business and the creation of
the note was "typical," then you should have your money
within four weeks.
David Springer is a consultant for Sovereign Funding Group.
Sovereign Funding Group is an experienced, reputable company
that offers convenient, no-risk services to help you with
the selling of your deferred payments and business financing
including business notes.
Topics: Investing |
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