It definitely helps to sell your business if you carry a note for the buyer. In this forum I’ve previously discussed how to secure your business note.
What about selling your note after the close of escrow? Do you want to effectively “cash out” of the sale? There are Companies who specialize in purchasing Business Notes (of course at a discount). You can sell all or part of your note. Most of the Companies will offer to buy year to year of the note. In other words buy the first two or three years of payments. After collecting for the agreed upon amount of time, the note and its payments would revert back to the seller of the business. Of course the seller can sell the entire note too.
The note buyers will purchase the note at a discounted amount of the face value. Discounts vary according to several factors. Interest rate, length of note amortization, buyer’s down payment, buyer’s strength both financially and experience wise, type of business, note position (1st, 2nd) and note seasoning. Below are a few of the most important guide lines.
Down Payment: The higher the down payment on the business sale the lower the discount of your note will be. Down payments should be at least 30% of the purchase price. Bringing the down payment up to 40-50% of the purchase price will greatly help reduce your note discount.
Note Positioning: The note should be in the 1st position as a lien on the business. 2nd’s are harder to sell and if you do find a buyer for a 2nd it will get heavily discounted.
Rate and Term: Interest rate should be 7% or higher and the term shouldn’t be beyond 60 months in order to maximize your buy out.
Seasoning: Note buyers like to see that the business buyer has made a few payments before they buy the note. I used to sell these straight out of escrow, but today note buyers like the note “seasoned” for a minimum of 2 months. 6 months is optimum. The longer the seasoning, the less your note will get discounted.
Discounting: Discounts usually range from 10 to 30% of the face value of the note. All of the factors discussed above will come into play in determining the discount rate.
Recourse and Non-recourse Note Purchasing: A note purchased with recourse will allow the note buyer to pursue the note seller in the event of a note default by the business buyer. A note purchased Non-recourse will not. Most note buyers will want to purchase notes with Recourse, but if most of the terms and conditions of the note listed above are favorable, you may be able to negotiate the Recourse out of the note purchase.
About The Author: Lee Petsas has been selling businesses with UBI Business Brokers in Southern California since 1981. In 1999 he became the Owner and Broker for UBI. He is still active daily in Listing and Selling businesses. He has been approved multiple times by Courts as an Expert Witness in the area of Business Valuations. UBI has been in Southern California selling businesses since 1965. You can reach Lee direct at 714-363-0440.