Business notes are created when a business owner sells a business and "carries back paper". This is more commonly referred to as seller financing. The note is secured by the business and its assets.
Approximately 80% of all small business sales in this country involve this type of financing. More often than not, the seller would prefer to have the cash up front instead of monthly payments over the course of several years.
There are, however, options for those who need or desire cash for any reason. Business noteholders can sell all or just a portion of their note for a lump sum of cash. The value of the note depends on a variety of factors, including the rate, terms, payment history and the experience of the business and the payor. For a note to be saleable, it should have 20-30% down, it must be in the first position and generally needs 2-3 months of seasoning. Once the pertinent information is supplied to the underwriter, an offer can be presented in as little as 24-48 hours.
It is important to clarify that the note holder is not taking a loan. Instead, they are selling the note at a discount to obtain cash in hand now. As we all know through the lesson of the timevalue of money, cash today is worth more than payments received in the future. To be upfront, the discounts, in some cases can be deep, but the risk is proportionate (in general, funding companies look for a yield of 20% or more). A well informed business person should realize that there are now multiple options available to them that present more favorable financial outcomes.
Contrary to past theories, the entire note does NOT have to be sold. In fact, by liquidating just a calculated number of payments, the noteholder can receive exactly the amount of cash they need now and still retain future income from the payments not assigned. Plus, they have the option to repeat the program again if the need arises. By selling a just a portion of the payments, a noteholder can actually receive MORE than the current balance of the note!
For Example:
The owner of a dry cleaning business sells it for $100,000. The buyer puts $30,000 down and the owner carries a $70,000 note @ 9% for 60 months or $1,453 per month.
After 3 months at home, he is driving his wife crazy and she insists he buy another business. He finds one, but needs to put down 50k. He has 30k from the previous sale, but needs an additional 20k.
Subject to all due diligence, the secondary market value for 16 monthly payments is approximately $20,000. The seller retains the payments not touched at this time (41). The seller of the note receives:
Cash down from the buyer: $30,000 First 3 monthly payments: $ 4,359 Cash from the "partial" sale of the note: $20,000 Future Cash Retained (41 payments): $59,573
Total Income from the sale: $113,932
By utilizing this customizable program, the note holder puts himself into an excellent financial position. Some might argue that he is losing out on the interest he would accrue over time. The same argument can be turned around: If the note was to be paid in full, he would not charge the buyer for future interest.
There are a few points to keep in mind: The first is for business brokers and sellers; by offering a buyer seller financing, you will increase the amount of interest in your listing and close the deal in less time. The second is for current noteholders who need CASH now; investigate your options so you do not leave money on the table.
Peter Siegel, MBA is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant (national SBA small business specialist) on selling and buying businesses, he provides professional assistance to business brokers, agents, and business owners in getting maximum response in their advertising & marketing efforts in regards to selling small to mid-sized businesses. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 866-270-6278.
Posted on June 4, 2008 | 
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